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Flexible budget

Flexible budget is a budget that changes with the changed production/sales volume or other significant variable.  Budgeted sales/revenues and variable costs are therefore flexed with the actual activity level, but fixed costs usually remain unchanged. Flexible budget shows how the financial pla

Top-down budgeting / Imposed budgeting

If this style of budgeting is used, budgets are prepared from top-down direction, i.e. senior management sets the high-level budget (often just basic numbers) without collecting detailed information from operating staff. This total general target is then broken down into detailed budget. The proces

Negotiated budgeting

Negotiated budgeting is a budgeting style which combines top-down and bottom-up budgeting approaches. Negotiated budgeting can start by setting the general figures by top management. But compared to top-down budgeting, operational managers are given an opportunity to negotiate these figures. But it

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). 

Budgeting and forecasting under risk or uncertainty

There are several approaches to planning (budgeting) that can be undertaken if uncertainty is a significant factor: rolling budgets scenario analysis/budgeting flexible budgeting calculating expected values carry out an sensitivity analysis

Static budget

Term static budget refers to budget that is not updated, either in terms of rolling of periods (months) and the changed conditions and circumstances. It is therefore both an opposite of rolling budget or synonym to flexible budget.   Static budget is useful mainly when the budget serves as

Bottom-up budgeting / Participative budgeting

If this style of budgeting is used, budgets are prepared from bottom-up, i.e. operating staff collects the detailed information from various departments/functions/other sources. Process usually has a budget coordinator – e.g. controller who aggregates/consolidates these lower-level budgets int

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

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

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