Definition of Budget

Budget

A detailed schedule of financial activity, such as an advertising budget, a sales budget, or a capital budget.

Budget

A plan expressed in monetary terms covering a future period of time and based on a defined
level of activity.

budget

a financial plan for the future based on a single level
of activity; the quantitative expression of a company’s commitment
to planned activities and resource acquisition and use

Budget

A set of interlinked plans that quantitatively describe a company’s projected
future operations.

Budget deficit

The amount by which government spending exceeds government revenues.

Capital budget

A firm's set of planned capital expenditures.

Capital budgeting

The process of choosing the firm's long-term capital assets.

Cash budget

A forecasted summary of a firm's expected cash inflows and cash outflows as well as its
expected cash and loan balances.

Activity-based budgeting

A method of budgeting that develops budgets based on expected activities and cost drivers – see also activity-based costing.

Budget cycle

The annual period over which budgets are prepared.

Budgetary control

The process of ensuring that actual financial results are in line with targets – see variance
analysis.

Flexible budget

A method of budgetary control that flexes, i.e. adjusts the original budget by applying standard
prices and costs per unit to the actual production volume.

Incremental budget

A budget that takes the previous year as a base and adds (or deducts) a percentage to arrive at
the budget for the current year.

Planning, programming and budgeting system (PPBS)

A method of budgeting in which budgets are allocated to projects or programmes rather than to responsibility centres.

Priority-based budget

A budget that allocates funds in line with strategies.

Rolling budgets

A method of budgeting in which as each month passes, an additional budget month is added such that there is always a 12-month budget.

Zero-based budgeting

A method of budgeting that ignores historical budgetary allocations and identifies the costs that are necessary to implement agreed strategies.

capital budgeting

Refers generally to analysis procedures for ranking
investments, given a limited amount of total capital that has to be allocated
among the various capital investment opportunities of a business.
The term sometimes is used interchangeably with the analysis techniques
themselves, such as calculating present value, net present value,
and the internal rate of return of investments.

Capital Budgeting

The process of ranking and selecting investment alternatives and
capital expenditures

activity-based budgeting (ABB)

planning approach applying activity drivers to estimate the levels and costs of activities necessary to provide the budgeted quantity and
quality of production

budgeted cost

a planned expenditure

budgeting

the process of formalizing plans and committing
them to written, financial terms

budget manual

a detailed set of documents that provides information
and guidelines about the budgetary process

budget slack

an intentional underestimation of revenues
and/or overestimation of expenses in a budgeting process
for the purpose of including deviations that are likely to
occur so that results will occur within budget limits

budget variance

the difference between total actual overhead
and budgeted overhead based on standard hours allowed
for the production achieved during the period; computed
as part of two-variance overhead analysis; also
referred to as the controllable variance

capital budget

management’s plan for investments in longterm
property, plant, and equipment

capital budgeting

a process of evaluating an entity’s proposed
long-range projects or courses of future activity for
the purpose of allocating limited resources to desirable
projects

continuous budgeting

a process in which there is a rolling
twelve-month budget; a new budget month (twelve months
into the future) is added as each current month expires

financial budget

a plan that aggregates monetary details
from the operating budgets; includes the cash and capital
budgets of a company as well as the pro forma financial
statements

flexible budget

a presentation of multiple budgets that
show costs according to their behavior at different levels
of activity

imposed budget

a budget developed by top management
with little or no input from operating personnel; operating personnel are then informed of the budget objectives and constraints

master budget

the comprehensive set of all budgetary schedules
and the pro forma financial statements of an organization

operating budget

a budget expressed in both units and dollars

participatory budget

a budget that has been developed
through a process of joint decision making by top management
and operating personnel

program budgeting

an approach to budgeting that relates
resource inputs to service outputs

rolling budget

see continuous budgeting

zero-base budgeting

a comprehensive budgeting process
that systematically considers the priorities and alternatives
for current and proposed activities in relation to organization
objectives; it requires the rejustification of ongoing activities

Capital budgeting

The series of steps one follows when justifying the decision to purchase
an asset, usually including an analysis of costs and related benefits, which
should include a discounted cash flow analysis of the stream of all future cash flows
resulting from the purchase of the asset.

capital budget

List of planned investment projects.

capital budgeting decision

Decision as to which real assets the firm should acquire.

Balanced-Budget Multiplier

The multiplier associated with a change in government spending financed by an equal change in taxes.

Budget Deficit

The excess of government spending over tax receipts.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

A federal Act
containing the requirements for offering insurance to departed employees.

Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.

Cost of capital

The required return for a capital budgeting project.

Dependent

Acceptance of a capital budgeting project contingent on the acceptance of another project.

Direct estimate method

A method of cash budgeting based on detailed estimates of cash receipts and cash
disbursements category by category.

Financial control

The management of a firm's costs and expenses in order to control them in relation to
budgeted amounts.

Hurdle rate

The required return in capital budgeting.

Post-audit

A set of procedures for evaluating a capital budgeting decision after the fact.

Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.

Forecast

A revised budget estimate or update, part-way through a budget period.

Profiling

A method of budgeting that takes into account seasonal fluctuations and estimates of when revenues will be earned and costs will be incurred over each month in the budget period.

Relevant range

The upper and lower levels of activity within which the business expects to be operating within the short-term planning horizon (the budget period).

Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a
routing.

Variance analysis

A method of budgetary control that compares actual performance against plan, investigates the causes of the variance and takes corrective action to ensure that targets are achieved.

appropriation

a budgeted maximum allowable expenditure

cash flow

the receipt or disbursement of cash; when related
to capital budgeting, cash flows arise from the purchase,
operation, and disposition of a capital asset

controllable variance

the budget variance of the two variance approach to analyzing overhead variances

fixed overhead spending variance

the difference between the total actual fixed overhead and budgeted fixed overhead;
it is computed as part of the four-variance overhead analysis

margin of safety

the excess of the budgeted or actual sales
of a company over its breakeven point; it can be calculated
in units or dollars or as a percentage; it is equal to
(1 - degree of operating leverage)

operational plan

a formulation of the details of implementing
and maintaining an organization’s strategic plan;
it is typically formalized in the master budget

overhead efficiency variance

the difference between total budgeted overhead at actual hours and total budgeted
overhead at standard hours allowed for the production
achieved; it is computed as part of a three-variance analysis;
it is the same as variable overhead efficiency variance

overhead spending variance

the difference between total actual overhead and total budgeted overhead at actual
hours; it is computed as part of three-variance analysis; it
is equal to the sum of the variable and fixed overhead
spending variances

predetermined overhead rate

an estimated constant charge per unit of activity used to assign overhead cost to production or services of the period; it is calculated by dividing total budgeted annual overhead at a selected level of volume or activity by that selected measure of volume or activity; it is also the standard overhead application rate

revenue center

a responsibility center for which a manager is accountable only for the generation of revenues and has no control over setting selling prices, or budgeting or incurring costs

standard

a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes

standard cost

a budgeted or estimated cost to manufacture
a single unit of product or perform a single service

variable overhead efficiency variance

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

variable overhead spending variance

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

variance

a difference between an actual and a standard or
budgeted cost; it is favorable if actual is less than standard
and is unfavorable if actual is greater than standard

volume variance

a fixed overhead variance that represents
the difference between budgeted fixed overhead and fixed
overhead applied to production of the period; is also referred
to as the noncontrollable variance

Cost of capital

The blended cost of a company’s currently outstanding debt instruments
and equity, weighted by the comparative proportions of each one. During a capital
budgeting review, the expected return from a capital purchase must exceed this cost
of capital, or else a company will experience a net loss on the transaction.

Direct materials mix variance

The variance between the budgeted and actual mixes of
direct materials costs, both using the actual total quantity used. This variance isolates
the unit cost of each item, excluding all other variables.

Internal rate of return

The rate of return at which the present value of a series of future
cash flows equals the present value of all associated costs. This measure is most
commonly used in capital budgeting.

Labor efficiency variance

The difference between the amount of time that was budgeted
to be used by the direct labor staff and the amount actually used, multiplied
by the standard labor rate per hour.

Materials price variance

The difference between the actual and budgeted cost to
acquire materials, multiplied by the total number of units purchased.

Materials quantity variance

The difference between the actual and budgeted quantities
of material used in the production process, multiplied by the standard cost per
unit.

Payback method

A capital budgeting analysis method that calculates the amount of
time it will take to recoup the investment in a capital asset, with no regard for the
time cost of money.

Production yield variance

The difference between the actual and budgeted proportions
of product resulting from a production process, multiplied by the standard unit cost.

Selling price variance

The difference between the actual and budgeted selling price for
a product, multiplied by the actual number of units sold.

Variable cost

A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.

controller

Officer responsible for budgeting, accounting, and auditing.

Deficit

See budget deficit.

National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.

Structural Deficit

The budget deficit in excess of the deficit that in the long run keeps constant the ratio of the publically held national debt to GDP.

Twin Deficits

The trade deficit and the government budget deficit.

Aggregate planning

A budgeting process using summary-level information to
derive various budget models, usually at the product family level.

Maximum inventory

An inventory item’s budgeted maximum inventory level,
comprising its preset safety stock level and planned lot size.

Minimum inventory

An inventory item’s budgeted minimum inventory level.

Cost of Capital

The discount rate that should be used in the capital budgeting process.

Salvage Value

The value of a capital asset at end of a specified period. It is the current market price of an asset being considered for replacement in capital budgeting.

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