Cost Accounting Exam 3 - Clarke

Master Budget

The comprehensive plan of an organization for a future period is expressed in quantitative and financial terms. The budget may be prepared for a year or for a shorter period, and it may be revised as time passes.

Planning and Control

What two basic purposes do budgets serve

Operating Budgets

This budget deal with operations (sales, production, purchases)

Financial Budgets

These budgets deal with cash flows and financial position (cash budget, balance sheet).

Sales Forecast

The Starting Point of the Master Budget

Master Budget

This budget is static for one specific activity level

Flexible Budgets

This budget shows costs that should have been incurred for the actual activity level.

Flexible Budget Variance

The difference between actual costs and the costs budgeted for the actual level of activity.

Activity Variance

The difference between flexible budget costs and the master (static) budget costs, caused solely by selling more/fewer units than planned.

Zero-Based Budget (ZBB)

A method where the budget is prepared from scratch without using last year's figures; all costs must be justified.

Budgetary Slack

The practice of managers intentionally underestimating revenue or overestimating expenses to make targets easier to hit.

Participative Budgeting

A system providing opportunities for managers at all levels to participate in developing the budget.

Traditional Budgeting Driver

Generally assumes that unit volume is the primary activity driver for variable costs.

Activity-Based Budgeting (ABB)

A system that identifies activities and their related drivers (like setups or inspections) rather than just relying on unit volume.

Goal Congruence

When a budgeting system encourages managers to act in the best interest of the entire company rather than just their own department.

Non-Cash Expenses in Budgets

Items like depreciation which appear in the Overhead Budget but must be excluded from the Cash Budget.

Governmental Budget Authorization

The Budget Ordinance, enacted by the legislative branch, which legally authorizes the executive branch to spend funds.