Share on Facebook A budget can be a document that sets strict spending limits for your small business or a template that changes and grows with your company as you get a better handle on your income and expenses.
A comprehensive plan is developed for all revenue and expenditures. Discretionary, engineered and committed costs. All revenue and expenditures for any company.
Appropriation Budgets The oldest type of budget is referred to as an appropriation budget. Appropriation budgets place a maximum limit on certain discretionary expenditures and may be either incremental, priority incremental, or zero based. Priority incremental budgets also involve an increase, but require managers to prioritize, or rank discretionary activities in terms of their importance to the organization.
The idea is for the manager to indicate which activities would be changed if the budget were increased or decreased. When it was popular, a more typical approach was to justify the last twenty percent of the budget, i.
From a control perspective, appropriation budgets are effective in limiting the amount of an expenditure, but create a behavioral bias to spend to the limit. Establishing a maximum amount for an expenditure encourages spending to the limit because spending below the limit implies that something less than the maximum appropriation was needed.
Spending below the limit might result in a budget cut in future periods. Since nearly every manager views a budget reduction in their discretionary costs as undesirable, there are frequently crash efforts at the end of a budget period to spend up to the limit.
Flexible Budgets The flexible budget was introduced in Chapter 4. The constant "a" represents a static amount for fixed costs and the constant "b" represents the rate of change in Y expected for a unit change in the independent variable X. The expression " bX" is the flexible part of the budget cost function.
The flexible budget technique is used for planning and monitoring all types of costs. The static amount "a" includes both discretionary and committed costs, while the flexible part "bX" includes various types of engineered costs.
The flexible characteristic of the technique enables the flexible budget to play a key role in both financial planning and performance evaluation. The planning dimension is emphasized in this chapter and the performance evaluation aspect is given considerable attention in Chapters 10 and Capital Budgets Capital budgets represent the major planning device for new investments.
Discounted cash flow techniques such as net present value and the internal rate of return are used to evaluate potential investments. Capital budgets are part of a somewhat more encapsulating concept referred to as investment management.
Master Budgets The fourth type of budget is referred to as the master budget or financial plan. The master budget is the primary financial planning mechanism for an organization and also provides the foundation for a traditional financial control system.
More specifically, it is a comprehensive integrated financial plan developed for a specific period of time, e. This is a much broader concept than the first three types of budgeting. The master budget includes many appropriation budgets typically in the administrative and service areas as well as flexible budgets, a capital budget and much more.
A diagram illustrating the various parts of a master budget is presented in Exhibit The master budget has two major parts including the operating budget and the financial budget See Exhibit The operating budget begins with the sales budget and ends with the budgeted income statement.
The financial budget includes the capital budget as well as a cash budget, and a budgeted balance sheet.
The main focus of this chapter is on the various parts of the operating budget and the cash budget. The budgeted balance sheet is covered briefly, but not emphasized.
A detailed discussion of capital budgeting and investment management is provided in Chapter 18 after some other prerequisite concepts are introduced. In the next section, we consider the purposes, benefits, limitations and assumptions of the master budget.
Integrates and Coordinates The master budget is the major planning device for an organization.Flexible Budgets ACC/ Risy Morales A flexible budget is a budget that allows varies degrees of activity.
Flexible Budgets are able to detect the different type of outcomes to each individual situation, or in other words reports based out of statistics. If someone asked you to save $1, right now, could you do it?
How would it make you feel? What would you cut back on? (Or would you need to . Appropriation Budgets. The oldest type of budget is referred to as an appropriation budget. Appropriation budgets place a maximum limit on certain discretionary expenditures and may be either incremental, priority incremental, or zero based.
Build the flexible budget based on the budgeted cost information pros and cons of static and flexible budgets Flexible budget helps in budgeting at different volumes and the actual costs with. CHAPTER 3 PREDETERMINED OVERHEAD RATES, FLEXIBLE BUDGETS, AND ABSORPTION/VARIABLE COSTING EXERCISES a.
(1) At any level, the variable cost is $2 per machine hour. Since four hours are needed to make one unit, the . hours a week means you can get ready for a new job without having to quit your job.
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