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ORIE 3150 Budgeting Nov 19 2009 plain

ORIE 3150 Budgeting Nov 19 2009 plain - ORIE 3150 Budgeting...

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ORIE 3150 Budgeting Budget – a formal written plan of action for a specified future time period, expressed in financial terms. Management uses budgeting to integrate the various components of the firm, and to provide insights into the appropriate scale of operations for the future. Budgeting - purposes 1. Compel planning 2. Improve coordination and communication 3. Provide a guide to action 4. Provide a basis for performance evaluation Budgeting Approaches 1. Cost driver approach – costs are budgeted and driven by the number of units of a certain cost driver. This could be units produced, sales dollars, etc. This is also known as the build-up or unit cost approach. 2. Incremental approach – costs are budgeted by applying a dollar or percentage (most common) change from a previous period. It is best used when the relation between number of units and costs is weak or non-existent. For example, advertising cost is usually budgeted using the incremental approach. Or, if the production rate of a factory is constant, then the budget may increase at the inflation rate (or decrease at some preset cost reduction rate). 3. Base level – the base level cost is the minimum amount needed to sustain the project. If any budget less than the base level is allocated, then the project must be terminated.
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