Glossary

Activity Variance - The diffrence between a revenue or cost item in the static planning in the static planning budget and the same item in the flexible budget. An activity variance is due soley to the difference between the level of activity assumed in planning budget and the actual level of activity used in flexable budgets.

Flexible budget - A report showing estimates of what revenues and costs should have been, given the actual level of activity.

Planning budget - Abudget at the beginning of the budgeting period that is valid only for the planned level of activity.

Revenue Variance - The differnce how much the revenue should have been the actual level of activity, and the activity revenue for the period. A favorable revenue variance occurs because the revenue is higher than expected, given the actual level of activity for the period.

Spending Varince - The difference between how much a cost should have been, given the actual level of activity, and the actual amount of cost. A favorable spending variance occurs because the cost is lower the expected, given the actual level of activity for a period.

Inventory Purchases

Merchandising company would prepare a merchandise purchases budget showing the amount of good to be purchased from suppliers during the period.

Budget cost of goods .............................................XXXXX
Add desired ending merchandise inventory...........XXXXX

Total Needs............................................................XXXXX
Less beginning merchandise inventory..................XXXXX

Required Purchases................................................XXXXX

The Production Buget

The production budget is prepared after the sales budget. The Production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory.

Budgeted sales in case................................................................XXXXX
Add desired ending inventory of finished goods........................XXXXX
Total Needs
Less Beginning inventory of finished goods..............................XXXXX
Required production in case.......................................................XXXXX

The self-Imposed Buget

The initial flow of the budget data in a participative budgeting system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.

Self-Imposed budget - is a budget that is prepared with the full cooperation and participation of managers at all levels.

The basic framework of Budgeting

A budget is a detailed plan for the future that is usually expressed in formal quantitative terms. Budgets are used for two distinct purposes, planing and control. Planning involves developing goals and preparing various budgets to achieve those goals. Control involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

Advantages of budgeting

Budgets communicate management's plans throughout the organization.

Budgets force managers to think about the plan for the future.

The budgeting provides a means of allocating resources to those parts of the organization where they can be used most effectively.

The budgeting process can uncover potential bottlenecks before they occur.

Budgets coordinate the activities of the entire organization by  integrating the plans of it's various parts.

Budgets define goals and objectives that can serve as a benchmark for evaluating subsequent performance.