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 and (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