Week Eight Flashcards
Explain what a budget is and describe the key steps in the budgeting process.
A budget is a set of short-term goals and targets in financial terms.
The key steps in the budgeting process are a consideration of past performance, an assessment of the expected trading and operating conditions, preparation of initial budget estimates, adjustments to estimates based on communication with and feedback from managers, preparation of the budgeted financial statements and any sub-budgets, monitoring of actual performance against the budget over the budget period, and, where necessary, adjusting the budget during the budget period.
Explain the different types of budgets.
Commonly prepared budgets include the sales or fees budget, the operating expenses budget, the production and inventory budgets, the purchases budget, the budgeted income statement, the cash budget, the budgeted balance sheet and the capital budget.
Outline the components of a master budget and prepare a master budget.
A master budget may be viewed as a set of interrelated budgets for a future period. The master budget is commonly classified into a set of operating budgets and financial budgets.
Prepare a schedule of receipts from accounts receivable and a cash budget.
A schedule of receipts from accounts receivable is often necessary when an entity provides goods or services on credit. The schedule helps to calculate the cash expected to be received from accounts receivable in the future, based on the credit sales or fees and the normal pattern of receipts.
This schedule is an important component of the cash budget, which focuses on expected future cash receipts and payments, and the expected cash levels at the end of each month, quarter or year
Explain the use of budgeting in planning and control.
The planning aspect relates to operationalising plans and developing budget estimates and targets. The control aspect is evident in the comparison of budget with actual performance.
Discuss the issues associated with the behavioural aspects of budgeting.
The behavioural aspects of budgeting relate to the human involvement in decision making. They include: the style of budgeting process used, such as authoritarian or participative; attempts by senior management to set targets that are too difficult to achieve; and attempts by unit managers to set targets that are too low.
Strategic planninng
process relating to the longer term planning (often three to five years) if the entities activities including issues such as expansion plans and radical product/service development
Budgeting
is a process that focuses on the short term, commonly one year and results in the production of budgets that set the financial framework for that period
Budgeting process
involves:
- consideration of past performance
- assessment of the expected trading and operating conditions
- preparation of initial budget estimates
- adjustment to estimates based on communication with and feedback from managers
- preparation of the budgeted reports and anu sub budgets
- monitoring of actual performance against the budget over the budget period
- making any necessary adjustments to the budget during the budget period
sales or fees budget
also serves as an important input variable for other budgets, and is, therefore often refered to as the cornerstone of the budgeting process. the sales or fees budget is commonly used to set the expected level of activity for the budget period. the expected level of activity is an important consideration for many of the other budgets.
operating/expenses budget
which is commonly an aggregation from functional, section or departmental expense budgets and which also serves as an input variable to other budgets. for example, the expenses budget relating to the operating of the accounting department is used, along with other (eg maketing) departmental budgets to build the overall operating expenses budget. it is sometimes simply called the cost budget.
prodiction and inventory budgets
are necessary in manufacting environments for planning production levels and managing inventory levels. there are usually sub budgets relating to direct materials, direct labour (if any) and indirect manufacturing overhead costs
purchases budget
for both merchandising and manufacturing entities which will set the required level of inventory/direct materials purchases based on data from the sales budget and possibly from the production and inventory budgets as well
manufacturing overhead budget
which is concerned with estimating the overheads or expenses associated with production activities
budgeted income statement
which is essentially an aggretion of many of the other sub budgets including the sales budget and operating expenses budget
