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Key Terms

Activity-based budgeting (ABB). A form of budgeting based on activity-based costing (ABC) that focuses on the cost of the activities involved in all functional areas of an organization.

Allocated costs. Non-production related costs such as rent, insurance, and administrative costs, that are allocated to individual units' operating budgets based on that unit's output.

Balanced scorecard. A method of translating an organization's strategic mission into multiple and linked objectives, focusing on financial, customer, internal business, and innovation and learning perspectives.

Budget. An organization's action plan, translating strategic objectives into measurable quantities that express the expected resources required and returns anticipated over a certain period of time.

Capital budget. A schedule detailing planned investment in capital assets, property and equipment.

Capital budgeting. A method of evaluating investment proposals to determine whether they are financially sound, and to allocate limited capital resources to the most attractive proposals.

Cash budget. A plan or schedule for expected cash inflows and outflows.

Financial budget. The part of the master budget that includes the budgeted balance sheet, the capital budget, the cash budget, and the budgeted statement of cash flows. The financial budget describes the expected sources of capital required to support the operating budget.

Fixed budget. A budget where the amounts are fixed over the budget period.

Fixed costs. Costs that remain the same through a wide range of production and sales volumes.

Flexible budget. A budget that can be "flexed" or adjusted when variances are computed to recognize the actual revenues and costs.

Gross margin. Gross profit divided by total revenue. Gross profit is total revenue minus cost of goods sold.

Incremental budgeting. A method of budgeting in which data from historical figures are used to establish a basis for future assumptions.

Kaizen budgeting. A form of budgeting that strives for continuous cost improvement or reduction.

Master budget. The umbrella budget that summarizes and integrates all the individual budgets within an organization.

Net present value. The current value of a future stream of cash flows, based on specific interest rate assumptions.

Operating budget. The part of the master budget that includes the expected revenues and costs summarized in the budgeted income statement.

Operating income. Revenue less cost of goods sold and selling, general and administrative costs.

Participatory budgeting. A budgeting approach that incorporates input from line managers in formulating assumptions and goals.

Revenue per employee. A measure of productivity, calculated by dividing total revenues by the number of full-time employees.

Rolling budget. A plan that is continually being updated so that the budget time frame remains stable while the actual periods covered by the budget change. At the end of each period (month, quarter, or year), a future period is added to the budget.

Run rate. An estimate of a future cost or revenue amount based solely on the current cost or revenue level.

SG&A. Selling, general, and administrative costs.

Static budget. A budget that remains unchanged throughout the budget period based on one set of expected outputs. Variances are computed at the end of the budget period.

Top-down budgeting. A budgeting approach in which individual departmental goals are set by senior management.

Variable costs. Costs that fluctuate with incremental changes in output.

Variance. Difference between an actual amount and a budgeted amount in a financial budget plan.

Zero-based budgeting. The method of beginning each new budgeting process from a zero base, or from the ground up, as though the budget was being prepared for the first time. Every assumption and proposed expenditure receives a critical review.

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