Term
| Characteristics of a budget (7) |
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Definition
1. A budget estimates the profit potential of the b/u
2. It is stated in monetary terms, although the monetary amounts may be back up by nonmonetary amounts
3. It generally covers a period of one year. If business is very seasonal, there may be 2 per year.
4. It is a management commitment; managers agree to accept responsibility for attaining the budgeted objectives.
5. The budget proposal is reviewed and approved by an authority higher than the budgetee
6. Once approved, the budget can be changed only under specified conditions
7. Periodically, actual financial performance is compared to budget, and variances are analyzed an explained. |
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Term
| Strategic planning vs. budgeting (3) |
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Definition
1. Budgeting focuses on 1 year, strategic planning is focuses on several
2. Strategic planning precedes budgeting and provides framework within which the annual budget is developed.
3. A strategic plan is structured by product lines/programs and a budget is structured by responsibility centers. |
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Term
| Forecasting vs. budgeting |
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Definition
1. Budget is a management plan (meaning management will try to make actual correspond with the budget).
2. A forecast is a prediction of what will most likely happen, no trying to shape it so what actually happens was what was predicted. |
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Term
| Characteristics of a forecast (6) |
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Definition
1. May or may not be stated in monetary terms
2. Can be for any time period
3. Forecaster does not accept responsibility for meeting the forecasted results
4. Forecasts are usually not approved by higher authority
5. A forecast is updated as soon as new information indicates there is a change in conditions
6. Variances from forecast are not analyzed formally or periodically. |
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Term
| Forecast is exclusively a planning tool while a budget is a planning and control tool |
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Definition
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Term
| 4 principle purposes of a budget |
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Definition
1. Fine tuning the strategic plan
2. Coordination - resolve inconsistencies between business units
3. Assigning responsibility
4. Basis for performance evaluation |
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Term
| Operating budget categories |
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Definition
1. Revenue budgets
2. Budgeted production and cost of sales
3. Marketing expenses
4. General and admin
5. R&D
6. Income taxes |
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Term
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Definition
1. Capital budget
2. Budgeted b/s
2. Budgeted c/f
4. MBO - open new sales office, new product lines, retrain employees. Problem is that they are separated from the budget preparation process. |
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Term
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Definition
Consists of members of senior mgmt, CEO, COO, CFO.
Reviews and either approves or adjusted each of the budgets |
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Term
| 4 steps of budget preparation process |
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Definition
1. Issuance of guidelines
2. Initial budget proposal
3. Negotiation
4. Review and approval |
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Term
| 1. Issuance of guidelines |
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Definition
Assumed inflation in wages, corporate policies on promotion.
Budget staff develops, senior mgmt approves |
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Term
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Definition
Can be classified into 2 categories:
1. changes in external forces
2. Changes in internal policies and procedures |
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Term
| 1. Changes in external forces (5) |
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Definition
1. Changes in the general level of economic activity as it affects the volume of sales
2. Expected changes in the price of purchased materials and services
3. Expected changes in labor rates
4. Expected changes in the cost of discretionary activities
5. Changes in selling prices |
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Term
| 2. changes in internal policies and procedures (3) |
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Definition
1. Changes in production costs, reflecting new equipment and methods
2. Changes in discretionary costs, based on anticipated changes in workload
2. Changes in market share and product mix |
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Term
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Definition
| superior and budgetee discuss budget proposal. Slack: difference between budget and best estimate |
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Term
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Definition
| Final approval is recommended by the budget committee to the CEO. CEO submits approval of budget to BOD for ratification. |
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Term
| 2 types of budget revisions |
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Definition
1. Procedures that provide for a systematic (quarterly) updating of the budgets
2. Procedures that allow revisions under special circumstances
*Mgrs should not be required to adhere to plans that subsequent events make suboptimum |
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Term
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Definition
| What mangers should do if there is a significant decrease/increase in sales volume from what was planned. |
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Term
| Participation in the budgetary process |
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Definition
1. Top down - rarely works
2. Bottom up |
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Term
| Budget participation - 2 positives when budgetee has influence and is involved |
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Definition
1. Likely to be greater acceptance of budget goals if they are perceived as being under mgrs control as opposed to being externally imposed
2. Participative budgeting results in effective information exchanges |
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Term
| Participative budgeting (2) |
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Definition
1. budgetee is involved in the budgeting process
2. budgetee must have influence over the numbers used |
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Term
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Definition
| Makes it seem as though the budgetee is involved, even though they are not |
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Term
| Characteristics of someone preparing the budget (3) |
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Definition
1. Fair
2. impartial
3. Personable |
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Term
| Reasons why senior mgmt approves achievable budgets (5) |
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Definition
1. If the budgeted target is too difficult, managers are motivated to take short-term actions that may not be in the long-term interests of the company.
2. Achievable budget targets reduce the motivation for managers to engage in data manipulation to meet the budget
3. If b/u profit budgets represent achievable targets, senior management can, in turn, divulge a profit target to security analysts, shareholders, and other external constituencies with a reasonable expectation of being correct.
4. A profit budget that is very difficult to attain usually implies an overly optimistic stales target. May lead to over-commitment of resources to gear up for higher sales activity.
5. When b/u managers are able to meet and exceed their targets, there is a “winning” atmosphere and positive attitude within the company. |
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Term
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Definition
1. Review and approval
2. Follow-up on budget results |
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Term
| Quantitative techniques (2) |
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Definition
1. Simulation - model of real situation then manipulated to see the outcome of that situation
2. Probability estimates - Monte Carlo process - probability distribution by running a model many times. this one is used less frequently. |
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