Budgeting and Budgetary Control flashcards

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Master Budget

A comprehensive financial plan for an organisation for a specific period, which consolidates all the individual functional budgets (sales, production, cash, etc.) and concludes with a budgeted statement of profit or loss and statement of financial position.

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Limiting Factor (Principal Budget Factor)

The factor that restricts an organisation's activities and performance for a given period. It is the starting point for budget preparation. Common examples include sales demand, production capacity, or availability of materials.

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Flexible Budget

A budget that is adjusted to the actual level of activity achieved. It provides a more realistic benchmark for comparing actual costs, as it separates costs into fixed and variable components.

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Budgetary Slack

The practice of intentionally underestimating revenues or overestimating costs when preparing a budget. Managers may do this to make targets easier to achieve and secure a favourable performance review.

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Profit Reconciliation Statement

A statement that explains the difference between an original budgeted profit and the actual profit achieved by systematically showing the impact of all sales and cost variances.

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Cash Budget

A detailed forecast of cash inflows and outflows over a specific period. Its primary purpose is to help manage liquidity, ensuring the business has enough cash to meet its short-term obligations.

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Variance

The difference between a budgeted, planned, or standard amount and the actual amount incurred or sold. Variances can be Favourable (F) if they increase profit, or Adverse (A) if they decrease profit.

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Participative Budgeting (Bottom-up)

A budgeting approach where lower-level managers are actively involved in setting their own budgets. This can increase motivation and realism but may also lead to budgetary slack.