Management Accounting (Chap 15)

chap 15 - Module B

Define the term ‘budget’. How are budgets used in planning?

it is a detailed financial plan for future periods that coordinates business activities. It supports planning by ensuring managers anticipate future operation and resources.

Describe the different stages in the planning and control process.

Strategic planning(setting long-term goals)

Long-term plan(strategy into major actions)

Annual budget (details the financial plan for upcoming yr)

Monitor actual performance( the performance compares to the plan?)

Respond to deviations(corrective actions are taken)

Feedback loops allow updates to both long term and annul plans as condition changes

Distinguish between budgeting and long-range planning. How are they related?

Long-range planning focuses on strategy and broad objectives over multiple years and budgets use those long term plans into detailed steps for upcoming year 

Describe the different purposes of budgeting.

Planning, coordinating, communicating, motivating, controlling, and evaluating performance. ensures accountability across the business.

Explain what is meant by the term ‘management by exception’.

Managers focus only on significant deviations from the budget to save time and highlight the areas needing correction. 

Describe how the different roles of budgets can conflict with one another.

Budget used for motivation may require a little unrealistic goals whereas planning requires realistic one thereby trying to satisfy these extreme goals can create tension and reduce effectiveness.

Distinguish between continuous and rolling budgets.

Rolling budget hifts forward constantly

continuous budget covers dull year without update

Describe the different stages in the budgeting process.

• Communicate guidelines to manager to know expectations

• Identify principal budget factor to determine limits of overall activity

• Prepare sales budget, as it is the prime budget driver

• Prepare functional budgets based on expected operations

• Negotiations to ensure realistic targets

• Coordination  and review ensure all budgets align

• Master budget is approved and becomes official

• Ongoing monitoring (compare actual vs predicted)

Involves both bottom-up participation and top down approval

All budgets depend on the sales budget. Do you agree?Explain.

Mojority of the time yes, because sales usually determine production and purchasing = principal budget factor

*sometimes, capacity limits may drive budget planning instead

What is a master budget?

Combines all functional budgets into a complete financial plan

• Budgeted balance sheet (profit plan)

• Cash budget (liquidity plan)

• Budgeted income statement (profit plan)

Define incremental budgeting.

A budgeting method using last year’s figures as a baselines and adjusts it for expected changed

• simple

• may carry forward inefficiencies

What are the distinguishing features of activity-based budgeting?

A budgeting method that looks at required activities instead of historical spending

• looks at costs to drivers of operations and manages indirect costs more effectively

Describe the five different stages that are involved with activity-based budgeting.

1. Estimate production/sales volume

2. Identify and estimate activity demand (eg. number of orders)

3. Determine resources needed for each activity

4. Estimate resource supply

5. Adjust resource capacity to requirements

What are line item budgets?

A list of expenditures by category (eg.wages, suppliers) showing how money will be spent.

How does zero-based budgeting differ from traditional budgeting?

• All costs start from zero in zero based budgeting

• Traditional justifies changes and carries forward past figures

What are discretionary costs?

costs that support activities that are not directly linked to measurable output levels 

ex. R&D/staff training/advertising

Distinguish between zero-based budgeting and priority-based incremental budgeting.

Zero based budgeting - starts from zero, funds highest value decisions

PBIB adjusts existing budgets, ranks priorities ONLY when resources are limited