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- Soon out of date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
What is an unfavourable variance?
Occurs when sales value is less or expenditure is greater than budgeted
What is price variance
Difference between budget and actual price multiplied by the actual sales volume. Some principle can be applied to material costs or labour rate variances
