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FSM 122 Budgeting
FSM 122 Budgeting
26
Health Care
Undergraduate 4
03/06/2013

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Term
Budgeting
Definition
An estimate of the income and expenditure during a given period of time based in the mission, goals, and objective of an organization.
In other words, an organization’s business plan expressed in financial terms.
Term
The purpose of budgeting
Definition
- Budget helps to set the parameters for activities to be done during the budget period
- Acts as a control device for regulating spending for an organization.
- Provides an objective set of criteria against which a manager’s performance can be measured.
Term
Operative budgets
Definition
- Budgets that take into account:
a. Revenue
b. Expenses
c. Direct labir
d. Direct material
e. Overhead budgets
f. Other operating expenses
- It is used in projecting the income of an organization and in allocating funds within an organization.
- Can be incremental or zero-based + fixed or variable
Term
Types of operating budgets
Definition
- Incremental
- Zero- based and fixed (static)
- Variable (flexible)
Term
Incremental budget
Definition
- Based on the previous year’s budget and a predetermined increment.
- This increment may depend on a number of factors such as inflation rate, labor contracts, profitability, operating losses, restructuring, reengineering, and so on.
Term
3 options for handling incremental budgets
Definition
- Each budget item is increased (or sometimes decreased) by a predetermined percentage
- Manager is allocated total sum which has already been incrementally increased, and is allowed to distribute it among budget items
- Manager is allocated total sum unchanged, and must request additional funds.
Term
Advantages and disadvantages of incremental budgets
Definition
Advantages
- Easy to prepare
- Usually precise (if based on accurate records)
Disadvantages
- Unresponsive to change
- Discourages innovation
- Supports status quo, and therefore existing inefficient practices
Term
Zero-based budget
Definition
- Based on estimated need for the coming year, without relying on last year’s budget as a starting point.
- Requires managers to write budgets from scratch and to justify every dollar of proposed spending.
Term
Zero-based budget: goal is for manager to…
Definition
- Delineate functions within his/her span of control
- Assign an annual cost to each function
Term
Situations where zero-based budget work well
Definition
- During restructuring, rapid change
- For start-up or high-tech companies
Term
Disadvantages of zero-based budget
Definition
- Difficult and costly to prepare
- Vulnerable to politics, manager’s bias
Term
Fixed budget
Definition
- Budget plans for which funds are allocated for the entire fiscal year
- It is also know as a static budget and can be applied to either the 0 budget or to the incremental budget
- Provide manager with measurable goals, but inflexible and unresponsive to volume changes
Term
Variable budgets
Definition
- Budget plans for which expenses will vary in response to actual production, volume, or revenues
- Also referred to as flexible budget and can be used in conjunction with either the 0 budget or to the incremental budget
- Accounts for variation in cost with vol fluctuations
- Drawbacks: more reactive than predictive, many orgs can’t respond quickly to vol changes
Term
Time period for operating budget
Definition
- Fiscal year: a 12 month period for which an organization plans the use of its funds. Can begin on any date and end 365 days later (366 in leap years)
- Calendar year: a 12 month period that begins jan 1 and ends on dec 31
Term
Accounting
Definition
- The operating budget is divided for accounting purposes
- Accounting period: the time period designed by an organization for the purposed of financial reporting.
a. May be 4 weeks in length (13 periods/yr)
b. May be a calendar month (12 periods/yr)
- Does not carry over from one year to the next
Term
Typical procedure for preparing the operating budget
Definition
- Project revenues
- Estimate labor needs and costs
- Estimate non-labor expenses
- Combine parts of the budget to project profit or loss
Term
Preparing the operating budget: cost center
Definition
Any unit within an organization that has expenses
Term
Preparing the operating budget: revenue
Definition
- Revenues center: any department within an organization with an income that exceeds operating costs.
- The project of the income of an organization or a department based on the sale of products/services
- Consideration:
a. Prices and sales vol (and their relationship)
b. Money from nonsales sources
c. Bad debts
Term
Preparing the operating budget: profit center
Definition
Any department within an organization with an income that exceeds operating costs
Term
Preparing the operating budget: expenses
Definition
Component of the operating budget that deals with all anticipated costs, which can be further divided into a number of sub-budgets:
- Labor
- Material
- Overhead
- Other operating expenses
Term
Preparing the operating budget: labor expenses
Definition
- A prediction of the labor costs needed to get work done; does not always include the cost of benefits. It can be written as part of the expense budget or as a sepatate part of the operating budget
- Direct labor costs: related to the actual performance of work (base pay, overtime, pay in lieu of benefits)
- Indirect labor costs (benefits like insurance, taxes, and paid time off)
Term
Preparing the operating budget: material expenses
Definition
Direct materials
- The estimated cost for raw materials to be used in the production of goods
- This part of the operating budget is computed for departments that produce a tangible product
Indirect materials
- Those items needed to get the work done, but do not end up in the goods produces (like towels)
Term
Preparing the operating budget: overhead expenses
Definition
The general expenses associated with the operating of a facility that include rent, taxes, utilities, repairs, and maintenance.
Term
Preparing the operating budget: other operating expenses
Definition
- Encompasses all other anticipated costs of operation
- telephone bills, copy charge, printing, office supplies, books, traveling, journals, postage, fees and licenses
Term
capital budgets
Definition
- projects spending in items that are costly and durable such as land, buildings, and major pieces of equipment
- usually there is an organization-wide system for allocation of funds
- manages are not allocated funds
- managers write proposals to request funds
Term
preparing a capital budget: 5 step process
Definition
1. determine capital goods needed
2. prioritize items: more time/energy spent justifying most needed items
3. estimate costs
- cost is likely to change between time of budget preparation and time of funding
- probably too early to choose specific product
- time constraints
4. write budget requesting using organization-specific format: justification usually most crucial part of document
5. submit paperwork on time and in correct form
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