Budgeting Common Terms and Definitions

Terms and definitions for budgeting  in general and capital budgeting are also included here. Check it out.

  • Budget – A formal written statement of management’s plans for a specified future time period, expressed in financial terms.
  • Static budget – A projection of budget data at one level of activity.
  • Participative budgeting – A budgetary approach that starts with input from lower-level managers and works upward so that managers at all levels participate.
  • Flexible budget – A projection of budget data for various levels of activity.
  • Master budget – A set of interrelated budgets that constitutes a plan of action for a specific time period.
  • Financial budgets – Individual budgets that focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.
  • Operating budgets – Individual budgets that result in a budgeted income statement.
  • Budgeted income statement – An estimate of the expected profitability of operations for the budget period.
  • Sales budget – An estimate of expected sales revenue for the budget period.
  • Merchandise purchases budget – The estimated cost of goods to be purchased by a merchandiser to meet expected sales.
  • Production budget – A projection of the units that must be produced to meet anticipated sales.
  • Direct materials budget – An estimate of the quantity and cost of direct materials to be purchased.
  • Direct labor budget – A projection of the quantity and cost of direct labor necessary to meet production requirements.
  • Manufacturing overhead budget – An estimate of expected manufacturing overhead costs for the budget period.
  • Selling and administrative expense budget – A projection of anticipated selling and administrative expenses for the budget period.
  • Budgeted balance sheet – A projection of financial position at the end of the budget period.
  • Cash budget – A projection of anticipated cash flows.
  • Sales forecast – The projection of potential sales for the industry and the company’s expected share of such sales.
  • Budget committee – A group responsible for coordinating the preparation of the budget.
  • Budgetary control – The use of budgets to control operations.
  • Budgetary slack – The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals.
  • Long-range planning – A formalized process of selecting strategies to achieve long-term goals and developing policies and plans to implement the strategies.

Capital Budgeting Terms and Definitions

  • Capital budgeting – The process of making capital expenditure decisions in business.
  • Cost of capital – The rate of return that management expects to pay on all borrowed and equity funds.
  • Annual rate of return technique – Determines the profitability of a capital expenditure by dividing expected annual net income by the average investment.
  • Cash payback technique – Identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.
  • Discounted cash flow technique – Considers both the estimated total net cash flows from the investment and the time value of money.
  • Discount rate – Interest rate used in discounting the future net cash flows.
  • Incremental analysis – The process of identifying the financial data that change under alternative courses of action.
  • Internal rate of return (IRR) – The rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows.
  • Internal rate of return method – Finds the interest yield of the potential investment.

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