Budgeting

Question 1

what are objectives?

Answer 1

what the business is ultimately seeking to achieve

Question 2

what is a long-term plan?

Answer 2

defines the general direction of the business over
next five or so years

Question 3

provide examples of long-term plan

Answer 3

Market(s) the business aims to serve
• Production / service methods
• Levels of profit sought
• Financial / financing requirements and methods
• Personnel and other requirements

Question 4

what is a budget?

Answer 4

financial plan for a future time period. Short-term business plan for the following 12 months

• Expressed mainly in financial terms
• Converts the long-term plan into an actionable blueprint for the future

Question 5

distinguish budget and forecast

Answer 5

 A budget is a plan for a future time

• Sales revenues and expenses
• Cash flows
• Short-term credit to be given or taken
• Inventory requirements
• Personnel requirements
 Forecasts tend to be predictions of the future state of the environment. They are useful to the planner / budget setter.

Question 6

are budgets always produced for the following two months?

Answer 6

not necessarily

the manager has discretion.

May also depend on the industry

Question 7

how may limiting factors influence the budget?

Answer 7

Limiting factors are aspects of a business that thwarts it from achieving objectives.

• Managers need to take account of these factors when preparing their budget.

Question 8

what are examples of limiting factors?

Answer 8

• Examples: limited ability to sell products, a shortage of funds, labour, materials or plant.

Question 9

what is a period budget?

Answer 9

periodic budget:

is prepared for a particular period (usually
one year). The budget is prepared just once during each financial year.

Question 10

what is a rolling budget?

Answer 10

A rolling budget (also called continual budget) changes the start date of the budget once a period being budgeted has passed.
• It ensures that all times there will be a budget for a full planning period

Question 11

limitation of rolling budget

Answer 11

time consuming. It may be unreasonable to expect
managers to take this future-oriented approach continually

Question 12

what does interrelationship of budgets refer to?

Answer 12

In a business, there is not one budget, but several -
each relating to a specific aspect of the business
 Ideally, there should be a separate budget for each
person in a managerial position

eg. finished inventories budget, production budget, cash budget, raw inventories budget etc. interact

Question 13

Describe the first 3 steps of the budget setting process

Answer 13

1. Establish who will take
   responsibility for the
   budget-setting
   process
2. Communicate budget
   guidelines to relevant
   managers
3. Identify the key or
   limiting factor

Question 14

describe steps 4-6 of budget setting process

Answer 14

4.Prepare the budget for
the area of the
limiting factor

5.Prepare draft budgets
for all other areas

6.Review and co-ordinate
the budgets

Question 15

describe steps 7-9 of budget setting process

Answer 15

7.Prepare the
master budgets

8.Communicate the budgets
to interested groups

9.Monitor performance
relative to the
budgets

Question 16

what are the five main uses of the budget?

Answer 16

1. Allows business to be prudent and **foresee **short-term problems, take early course of action
2. Help co-ordinate various sections of the business;
3. Motivate managers to achieve better performance;
4. Provide a basis for a system of control;
5. Provide a system of authorisation for managers to
   * *spend up to a limit**

Question 17

what is the key budget and why?

Answer 17

The cash budget is a key budget

• all aspects of a business are eventually reflected in cash
• The cash budget reflects the whole business more than any other single budget
  
  • Particularly important for small businesses

Question 18

what does a budgeted income statement look like?

Answer 18

Question 19

how may you use budgets as control?

what is control?

Answer 19

Budgets represent the plan and therefore provide
the basis for exercising control over the business

making events conform
to a plan by taking corrective action when needed

Question 20

planning and controlling process steps 1-3

Answer 20

1. Identify objectives
2. consider options
3. evaluate options and make a selection

Question 21

planning and controlling process

steps 4-6

Answer 21

4. Prepare long-term plans (long-term budgets)
5. Prepare budgets (short term)
6. Perform and collect information on actual performance

Question 22

planning and controlling process 7-9

Answer 22

7. Identify and analyse differences between** plans and actuals** (variations or variances)
8. Respond to variances and exercise control
9. Revise plans (and budgets)if necessary

Question 23

how may you use budgets for control?

what is the most important budget target?

Answer 23

Comparing actual performance with the budget

 The most important budget target to meet is the profit target
eg. Draw a comparison between actual costs incurred and the budgeted costs for the actual level (volume) of production achieved

Question 24

using budgets for control

what is a flexed/flexible budget?

Answer 24

a budget revised to reflect costs that would have been expected for the actual activity (i.e. the volume of output which actually occurred).

Question 25

using budgets for control what is the benefit of using a flexed/flexible budget?

Answer 25

makes a **more accurate comparison** between budget and actual performance

Question 26

Using budgets for control what is the difference between original and flexed budget **profit figures** called?

Answer 26

sales volume variance

Question 27

key variances - the differene between budget and actual

Answer 27

 **Sales volume** (quantity) variance  **Sales price** variance  **Materials** variances  **Labour** variances  **Fixed overhead spending** (expenditure) variance

Question 28

what is the formula for Key variances, the difference between budget and actual?

Answer 28

*budgeted profit* + *all favourable variances* - *all adverse variances* = **actual profit **

Question 29

Why may managers not investigate variances?

Answer 29

Can be both time-consuming and expensive

Question 30

what approach can the manager take in investing variances?

Answer 30

policy on which **variances to investigate** and which to **ignore**

Question 31

Investigating variances what are 3 types of variances?

Answer 31

1. Significant adverse variances 2. significant favourable variances 3. insiginificant variances

Question 32

Investigating variances 1. significant adverse variances how should the manager approach these?

Answer 32

since they represent a **potentially very costly fault,** they need to be investigated

Question 33

investigating variances 2. Significant favourable variances how should the manager approach these?

Answer 33

since they represent things not going to plan, this may indicate **targets are too low**, and should probably also be **investigated **

Question 34

investigating variances 3. insiginificant variances how should the manager approach these?

Answer 34

should be kept under review in case they are **not the result of chance factors **

Question 35

what are limitations to budgetary control?

Answer 35

* Not all expenses can be directly linked to **productive activity** * Standards can rapidly become obsolete due to **technological and price change factors** * Factors outside of management control can impact * Delineating management responsibility may **prove difficult in practice **

Question 36

discuss behavioural aspects of budgetary control

Answer 36

 Existence of budgets tends to **improve performance**  Demanding but **achievable targets** seem to **motivate** more than easy targets  **Unrealistic targets** adversely affect performance  Allowing managers to set their own targets improves **motivation, commitment and performance **

Question 37

what does it mean to flex the budget?

Answer 37

compare **actual costs with budget costs** based on the *_actual level of output_* (production or sales)

Question 38

what are examples of discretionary costs and how do they relate to output level?

Answer 38

Training and advertising represent discretionary costs that are **not directly linked t**o output level.