Management Accounting Set 2

What is a budget ?

A quantified plan of expected revenues, costs and profits for a specific period (usually 1 year)

What is forecasting?

A regularly updated estimate of what will actually happen, based on current data and trends - more flexible than a fixed budget.

Difference between budget and strategic plan?

Budget: short-term (1y), detailed, financial focus.

Strategic plan: medium-/long-term (3-5y), directional, connects goals to market vision 

What is zero-based budgeting ?

Every expense must be justified from scratch each year - useful for cost control and automatic renewals of bast budgets.

What is incremental budgeting ?

Start from last year’s numbers and adjust for growth/inflation - simple but risks locking in inefficiencies

Why is forecasting important in controlling?

It lets managers anticipate variances early and adjust decisions before the end of the period (e.g. cutting costs, shifting resources)

What is rolling forecasting?

Updating forecasts continuously (monthly or quarterly) to always cover 12 future months - aligns short-term control with strategy 

What’s special about Brunello Cucinelli’s budgeting philosophy?

He integrates ethics and long-term humanist values into financial planning - aiming for “gracious growth” not aggressive short-term targets.

How does Cucinelli’s approach differ from typical corporate budgeting?

Budgets emphasize craftsmanship, community and brand integrity rather than pure cost-cutting

→ controlling serves quality and culture not just efficiency

What’s the lesson from Cucinelli for controllers?

Budgets should reflect the brands purpose and long-term sustainability; financial control can protect creativity rather than constrain it. 

What is Operational Leverage?

The degree to which fixed costs amplify changes in profit when sales fluctuate. 

High fixed costs = high leverage = profits rise faster after breakeven, but losses deepen below it.

Formula for Degree of Operating Leverage

DOL= %change in EBIT/ %change in Sales

Why does operational leverage matter?

It shows how sensitive profits are to sales changes → helps managers balance risk and flexibility when planning cost structure.

What does “cost-control through analysis of cost nature” mean?

Breaking down total costs into fixed/variable/semi-variable to find where scalability or waste lies.

How does understanding cost behavior help growth?

By knowing how costs move with size/output, you can forecast profit impact, set realistic targets and choose whether to scale or streamline.

Relationship between size (sales/output) and costs:

• Fixed costs: stay constant → lower unit cost as size grows (economies of scale).

• Variable costs: rise proportionally with size.

• Goal: grow sales faster than total costs → margin expansion.

Example of cost-size analysis:

Factory fixed cost €100k; variable cost €20 per unit.

At 1000 units → unit cost : 100+20=€120

At 2000 units → unit cost : 50 + 20 =€70

→ Doubling output nearly halves cost per item → operating leverage

What is COGS ?

Costs necessary to the acquisition or production of goods or services to be sold

What are SG&As

Selling, General and Administrative Costs.

Costs necessary to the selling and marketing activities + general admin

What is the purpose of a P&L

To give a comprehensive view of the profitability of doing business including an exhaustive coverage of revenues/profits and costs/losses.

Comparable/Like for like numbers

At constant currency and perimeter: strip out parameters which are out of the control of management

Population:​

In statistics, a population is a representative sample of a larger group of people or even things with one or more characteristics in common.

What is interest rate 

The amount a lender charges a borrower and is a percentage of the principal - the amount loaned 

Bullet loan

Interest and principal are paid back at the end in one instalment (one shot)

Compound Interest

Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.

Compound Interest Formula 

[P (1 + I%)^N]- P  

P: Principal 

I: Interest Rate 

N: Number of Periods 

FV of a product calculation

PV(1+I%)^N

used for a constant value of inflation/interest

I: growth rate in percentage terms

Present Value of a product from FV calculation.

PV = FV/(1 + i)ⁿ

^{I: growth rate in percentage terms}

cost center

A cost center is a department or function within an organization that does not directly add to profit but is incurring expenses necessary for the organization to operate​ (unlike a profit center which contributes directly to the organisation and have a P&L)