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Zero-based budgeting

Zero-based budgeting is the opposite approach to incremental budgeting as it begins the budgeting process from zero. Therefore, no past results are considered and budgets “are built” from item to item from the very beginning. It is very lengthy process and therefore, zero-based budgets a

Budget committee

Budget committee is a group of people that are responsible for budget preparation, review and approval. It is usually formed by senior managers including finance director. (26)  

Master budget

Master budget is the overall budget that summarizes lower-level operational budgets. It usually includes: summary of the most important points from strategy summary of planning assumptions used a set of financial statements – i.e. profit and loss statement, balance sheet and cash-flow sta

Budgetary control

Budgetary control is the process during which actual results are ascertained and compared with budgeted figures (variance analysis). The found differences are called variances (or deviations) and are usually further analyzed.  A remedial action can be taken based on this analysis. The correctiv

Direct labor cost variance

Direct labor cost variance can be split into:   Direct labor rate variance Calculation:  actual total direct labor costs - (total actual labor hours worked  x  budgeted labor hour rate) Interpretation: calculates the portion of labor costs variance driven by the changed la

Variable production overheads variance

Variable production overheads variance is calculated similarly as direct labor cost variance. Only variable production overhead per labor hour must be calculated instead of labor rate.   Example Budget: 10 labor hours per €10/hour are necessary to produce a unit; produced output is 1 00

Steps during budget preparation

  1. CEO appoints budget committee and budget coordinator. Budget committee is a group of people that are responsible for budget preparation, review and approval. It is usually formed by senior managers including finance director. (26)   2. Review the system of responsibility (budget) c

Principal budget factor

it is the key and limiting factor within the entity. Because it limits other operations, budgets containing principal factor shall be prepared first. It is usually sales, but others may be possible (e.g. raw materials if they are rare). 

Sensitivity analysis / What-if analysis

Sensitivity analysis (also called what-if analysis) is a technique which is used to calculate the output variable (e.g. profit, revenues or costs, NPV) under different assumptions (often different sales quantity, selling price, unit variable costs, etc.).  It is used during budgeting process an

Variance analysis

The purpose of variance analysis is to ascertain the quantitative deviation between budgeted, forecasted or otherwise estimated figures and accounting actuals and analyze this deviation into bigger detail. It is a valuable control mechanism.   Factors to consider when deciding whether it is w

Direct material cost variance

Direct material cost variance can be split into:   Direct material price variance Calculation:  actual total material costs - (actual quantity of total material used x budgeted price per unit of material used) Interpretation:  calculates the portion of variance driven by the ch

Fixed production overheads variance

In absorption costing, the total variance in fixed production overheads is equal to the amount of unabsorbed overheads, i.e.   total actual overheads – overheads absorbed to products = total actual overheads – (budgeted overheads per unit of production quantity * actual production

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