Term
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Definition
An estimate of the income and expenditure during a given period of time based in the mission, goals, and objective of an organization.
In other words, an organization’s business plan expressed in financial terms. |
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Term
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Definition
- Budget helps to set the parameters for activities to be done during the budget period
- Acts as a control device for regulating spending for an organization.
- Provides an objective set of criteria against which a manager’s performance can be measured. |
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Term
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Definition
- Budgets that take into account:
a. Revenue
b. Expenses
c. Direct labir
d. Direct material
e. Overhead budgets
f. Other operating expenses
- It is used in projecting the income of an organization and in allocating funds within an organization.
- Can be incremental or zero-based + fixed or variable |
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Term
| Types of operating budgets |
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Definition
- Incremental
- Zero- based and fixed (static)
- Variable (flexible) |
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Term
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Definition
- Based on the previous year’s budget and a predetermined increment.
- This increment may depend on a number of factors such as inflation rate, labor contracts, profitability, operating losses, restructuring, reengineering, and so on. |
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Term
| 3 options for handling incremental budgets |
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Definition
- Each budget item is increased (or sometimes decreased) by a predetermined percentage
- Manager is allocated total sum which has already been incrementally increased, and is allowed to distribute it among budget items
- Manager is allocated total sum unchanged, and must request additional funds. |
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Term
| Advantages and disadvantages of incremental budgets |
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Definition
Advantages
- Easy to prepare
- Usually precise (if based on accurate records)
Disadvantages
- Unresponsive to change
- Discourages innovation
- Supports status quo, and therefore existing inefficient practices |
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Term
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Definition
- Based on estimated need for the coming year, without relying on last year’s budget as a starting point.
- Requires managers to write budgets from scratch and to justify every dollar of proposed spending. |
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Term
| Zero-based budget: goal is for manager to… |
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Definition
- Delineate functions within his/her span of control
- Assign an annual cost to each function |
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Term
| Situations where zero-based budget work well |
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Definition
- During restructuring, rapid change
- For start-up or high-tech companies |
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| Disadvantages of zero-based budget |
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Definition
- Difficult and costly to prepare
- Vulnerable to politics, manager’s bias |
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Term
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Definition
- Budget plans for which funds are allocated for the entire fiscal year
- It is also know as a static budget and can be applied to either the 0 budget or to the incremental budget
- Provide manager with measurable goals, but inflexible and unresponsive to volume changes |
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Term
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Definition
- Budget plans for which expenses will vary in response to actual production, volume, or revenues
- Also referred to as flexible budget and can be used in conjunction with either the 0 budget or to the incremental budget
- Accounts for variation in cost with vol fluctuations
- Drawbacks: more reactive than predictive, many orgs can’t respond quickly to vol changes |
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Term
| Time period for operating budget |
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Definition
- Fiscal year: a 12 month period for which an organization plans the use of its funds. Can begin on any date and end 365 days later (366 in leap years)
- Calendar year: a 12 month period that begins jan 1 and ends on dec 31 |
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Term
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Definition
- The operating budget is divided for accounting purposes
- Accounting period: the time period designed by an organization for the purposed of financial reporting.
a. May be 4 weeks in length (13 periods/yr)
b. May be a calendar month (12 periods/yr)
- Does not carry over from one year to the next |
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Term
| Typical procedure for preparing the operating budget |
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Definition
- Project revenues
- Estimate labor needs and costs
- Estimate non-labor expenses
- Combine parts of the budget to project profit or loss |
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Term
| Preparing the operating budget: cost center |
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Definition
| Any unit within an organization that has expenses |
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Term
| Preparing the operating budget: revenue |
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Definition
- Revenues center: any department within an organization with an income that exceeds operating costs.
- The project of the income of an organization or a department based on the sale of products/services
- Consideration:
a. Prices and sales vol (and their relationship)
b. Money from nonsales sources
c. Bad debts |
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Term
| Preparing the operating budget: profit center |
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Definition
| Any department within an organization with an income that exceeds operating costs |
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Term
| Preparing the operating budget: expenses |
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Definition
Component of the operating budget that deals with all anticipated costs, which can be further divided into a number of sub-budgets:
- Labor
- Material
- Overhead
- Other operating expenses |
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Term
| Preparing the operating budget: labor expenses |
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Definition
- A prediction of the labor costs needed to get work done; does not always include the cost of benefits. It can be written as part of the expense budget or as a sepatate part of the operating budget
- Direct labor costs: related to the actual performance of work (base pay, overtime, pay in lieu of benefits)
- Indirect labor costs (benefits like insurance, taxes, and paid time off) |
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Term
| Preparing the operating budget: material expenses |
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Definition
Direct materials
- The estimated cost for raw materials to be used in the production of goods
- This part of the operating budget is computed for departments that produce a tangible product
Indirect materials
- Those items needed to get the work done, but do not end up in the goods produces (like towels) |
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| Preparing the operating budget: overhead expenses |
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Definition
| The general expenses associated with the operating of a facility that include rent, taxes, utilities, repairs, and maintenance. |
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Term
| Preparing the operating budget: other operating expenses |
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Definition
- Encompasses all other anticipated costs of operation
- telephone bills, copy charge, printing, office supplies, books, traveling, journals, postage, fees and licenses |
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Term
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Definition
- projects spending in items that are costly and durable such as land, buildings, and major pieces of equipment
- usually there is an organization-wide system for allocation of funds
- manages are not allocated funds
- managers write proposals to request funds |
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Term
| preparing a capital budget: 5 step process |
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Definition
1. determine capital goods needed
2. prioritize items: more time/energy spent justifying most needed items
3. estimate costs
- cost is likely to change between time of budget preparation and time of funding
- probably too early to choose specific product
- time constraints
4. write budget requesting using organization-specific format: justification usually most crucial part of document
5. submit paperwork on time and in correct form |
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