WK 10: Budgeting Flashcards
What are the three main purposes of management accouting
Planning, decision making and control
what is a budget
financial plan, prepared and approved by management usually for the year ahead
What are the advantages of budgeting? (5)
- Planning
- Co-ordination & communications
- Authorisation
- Motivation
- Performance measurement & control
What is a limiting factor
Constraint which will limit the business’s growth in the following year, level of sales often determines how a business should start to plan its operations
What is a master budget
The overall business financial plan, made up of a budgeted statement of profit and loss, cash budget, and budgeted statement of financial positions
What is a functional budget
The individual departmental budget, for example sales, production and finance
What is an incremental budget
Calculated by taking the previous year’s actual figures and adjusting for changes - price inflation
What is a zero-based budget
starts from first principles and calculates every number from scratch
What are the advantages of the zero-based budget
- Managers must justify all operating expenses
2. Keeps legacy expenses in check
What are the disadvantages of zero-based budgeting
- Can reward short term thinking
- Resource intensive
- Manipulation of Savvy managers
Problems of budgeting:
- Time consuming
- Soon out of date
- Tensions between departments
- Constrains entrepreneurial activity
What is a top-down budget
Imposed by management from above w little discussion about how targets are set
What is a bottom-up budget?
Built up from detail provided by each manager responsible for a budget with targets being agreed by all involved
What is a variance
difference between budget and actual sales/expenditure
What is a favourable variance
Occurs when sales value is more of expenditure is less than budgeted. This will result in a profit higher than budgeted
