Term
| definition of a operational budget |
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Definition
| covers one year and states the revenues and expenses planned for that year |
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Term
| characteristics of operating budget |
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Definition
-estimates the profit potential of a business unit
-stated in monetary terms but may be backed by nonmonetary terms
-generally covers a period of one year
-management commitment where managers accept responsibility for attaining the budgeted objectives
-budget proposal is reviewed and approved by higher authority
-once approved the budget can only be changed under specific circumstances
-periodically, actual financial performance is compared to budget and variances are analyzed and explained |
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Term
| contrast of budgeting and strategic planning |
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Definition
-focuses on different time frames (budgeting = 1 year where SP = 5 years)
-SP precedes budgeting and provides framework within annual budget is developed
-SP is structured by product lines where budgeting is structured by responsibility centers |
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Term
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Definition
| -forecast is merely a prediction of what will most likely happen carrying no implicatoin that the forecaster will attempt to so shape events so that the forecast will be realized |
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Term
| characteristics of forecasting |
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Definition
-may or may not be stated in financial terms
-can be for any time period
-forecaster does not accept responsibility for meeting the forecasted results
-usually not approved by a higher authority
-forecast is updated as soon as new info indicates there is a change
-variances are usually not analyzed formally |
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Term
| tools - budgeting vs. forecasting |
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Definition
-budgeting is a planning and control tool
-forecasting is just a planning tool |
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Term
| four principle purposes of budgeting |
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Definition
-fine tune the strategic plan
-help coordinate activities of the organization
-assign responsibility to managers to authorize the amounts they are permitted to spend and to inform them of the performance that is expected
-obtain a commitment that is a basis for evaluating a manager's actual performance |
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Term
| operating budget categories |
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Definition
-revenue budgets
-budgeted production cost and cost of sales
-marketing expenses
-general and admin expenses
-r*D expenses
-income taxes |
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Term
| other budget - capital budget |
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Definition
-states the approved capital projects plus a lump sum amount for small projects that don't require high approval
-some projects may be cut from this process |
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Term
| other budget - balance sheet |
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Definition
shows the balance sheet implications of decisions included in the operating budget and the capital budget
-can be a responsibility for operational managers |
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Term
| other budgets - cash flow |
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Definition
| shows how much cash needs during the year will be supplied by retained earnings and how much if any must be obtained from borrowing from outside parties |
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Term
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Definition
making objectives for the year that managers will be held accountable to is called management by objectives
-objectives of each RC is set forth in quantitative terms wehnever possible and are accepted by the responsible manager |
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Term
| why is management by objectives seperated from budgeting |
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Definition
-management by objectives was intially advocated by personnel texts whereas the financial budget is the province of management accounting texts
-should be part of the same planning process |
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Term
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Definition
-budget committee and department
-issuance of guidelines
-intial budget proposal
-negotiation
-review and approval
-budget revisions |
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Term
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Definition
| budgets that identify management actions to be taken if a specified event occurs that might change the strategy or org oeprations (hurricane, down economy) |
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Term
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Definition
-normally reports to the controller adminsters the information flow of the budgetary control system
-functions:
-publishes procedures and forms used
-coordinates and publishes corporate wide assumptions
-makes sure that information is properly communicated between units
-provides assistance to budgettees
-anaylzes proposed budgets and makes recommendations to committee and senior management
-administers process of budget revisions
-coordinates work of budget departments in lower departments
-analyzes reported performance against budget |
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Term
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Definition
-consists of members of senior management such as CEO, CFO
-Role: reviews and either approves or adjusts each of the budgets |
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Term
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Definition
-develop guidelines that govern the preparation of the budget for dissemination to all managers
-guidelines should be implicit in strategic plan
-budget staff develop guidelines and senior management approves |
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Term
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Definition
-RC managers develop a budget request
-budget is based on existing levels and is then modified based on changes in external forces or changes in internal policies |
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Term
| changes in external forces |
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Definition
-changes in general level of economic activity
-expected changes in the price of purchased materials and services
-expected changes in labor rates
-expected changes in the costs of discretionary activities
-changes in selling prices |
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Term
| changes in internal policies |
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Definition
-changes in production costs
-changes in discretionary costs
-changes in market share and product mix |
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Term
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Definition
-budget is discussed between manager and supervisor where the supervisor attempts to judge the validity of each of the adjustments
-generally should be an improvement in performance
-budgettees will try to create slack into their budget to make it easier to achieve |
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Term
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Definition
-moves up business unit to corporate
-ceo issues final approval after being recommedned by budget comittee
-BOD will ratify budget |
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Term
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Definition
two types -
-procedures that provide for a systematic updating of budget
-procedures that allow revisions under special circumstances
-must be justified basis of signifcantly changed conditions from those existing when the original budget was approved |
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Term
| 2 methods of participation of budge tprocess |
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Definition
-top down: senior management sets the budget for lower levels
-bottom up: lower level managers participate in setting budget amounts |
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Term
| best method for budget participation |
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Definition
| -combo of top down and bottom up where lower level prepares first draft of budget based on guidelines established by higher levels |
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Term
| 2 reasons that particpation in budgets has good effects |
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Definition
1. likely to be a greater acceptance of budget goals if they are being perceived as under the manager's control
2. results in effective information exchanges |
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Term
| reasons why budget should be attainable |
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Definition
-if budget is too dificult managers are motivated to take short term actions that may harm long term interest
-acheivable budget targets reduce motivation for managers to engage in data manipulation
-a profit budget that is very difficult to attain usually implies an overly optimistic sales target
-senior managers can divulge a profit target to security analysts with reasonable expectation of being right
-business unit managers are able to meet and exceed their targets it creates a winning atmosphere |
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Term
| why should senior management be involved in budget prep |
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Definition
senior management involvement is necessary for any budget system to be effective in motivating budgetees
-without their participatoin in the process, managers will have a greater temptation to play games with the system |
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Term
| budget department in participation of budget |
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Definition
-must walk a line between helping line manager and ensuring the integrity of the system
-must have rep for impartial and fair while having effeictve people skills |
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Term
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Definition
-simulation
-probability estimates |
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Term
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Definition
| -method that constructs a model of a real situation and then manipulates the model in such a way to draw conclusions about a real situation |
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