Week 7 Flashcards
What is a budget?
- The quantitative expression of a proposed plan of action by management for a specified period;
- An aid to coordinate what needs to be done to implement that plan.
Is a budget financial or non-financial?
A budget generally includes both financial and non-financial aspects of the plan, as it serves as a blueprint for the company to follow in an upcoming period.
A financial budget quantifies management’s expectations regarding income, cash flows and financial position. It prepares them for FUTURE PERIODS.
Underlying these financial budgets are non-financial budgets for e.g. units manufactured or sold, number of employees and number of new products being introduced to the marketplace.
Budgeting is most useful when it is integrated with a company’s strategy. Strategy is what?
Specifies how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.
e.g. Aldi strategy
In developing successful strategies, managers consider questions such as: (6)
- What are our objectives?
- How do we create value for our customers while distinguishing ourselves from our competitors?
- Are the markets for our products local, regional, national or global? What trends affect our
markets? How are we affected by the economy, our industry and our competitors? - What organisational and financial structures serve us best?
- What are the risks and opportunities of alternative strategies, and what are our contingency plans
if our preferred plan fails?
What is a master budget?
Management’s operating and financial plans for a specified period (usually a financial year) and it includes a set of budgeted financial statements. The master budget is the initial plan of what the company intends to accomplish in the budget period.
The master budget evolves from both operating and financing decisions made by managers: (2)
- Operating decisions deal with how best to use the limited resources of an organisation.
- Financing decisions deal with how to obtain the funds to acquire those resources.
What are three advantages of budgets?
- promote coordination and communication between subunits within the company
- provide a framework for judging performance and facilitating learning
- motivate managers and other employees.
Should a company’s budget be the only benchmark to evaluate performance?
No. Many companies also consider performance relative to peers as well as improvement over previous years. The problem with evaluating performance relative only to a budget is it creates an incentive for subordinates to set a target that is relatively easy to achieve.
What is one of the most valuable benefits of budgeting?
It helps managers learn. When actual performance falls short of budgeted or planned performance, it prompts thoughtful senior managers to ask questions about what happened and why, and how performance can be improved in the future. This probing and learning is one of the most important reasons why budgeting helps improve performance.
True or false: budgeting only involves top managers.
False. Budgeting is a time-consuming process that involves all levels of management. Top managers want lower-level managers to participate in the budgeting process because lower-level managers have more specialised knowledge and first-hand experience with day-to-day aspects of running the business.
Participation creates greater commitment and accountability towards the budget among lower-level managers. This is the bottom-up aspect of the budgeting process.
What is budgetary slack?
Describes the practice of underestimating budgeted revenues, or overestimating budgeted costs, to make targets more easily achievable.
Usually happens when budgeted variances are used to evaluate performance.
