Preparing Budgets

Question 1

What are the purposes of budgets?

Answer 1

Budget compels planning (seeing resources required and availability at the right time)
Budget communicates and coordinates (less confusion and anticipated problems and more goal congruence)
The budget can be used to authorise ( spending money and course of action, like public sector organisations, has authority)
Budget can be used to monitor and control ( monitor actual results against budget or change budget
Budget can be used to motivate ( also can used bonuses if targets met)

Question 2

What is goal congruence?

Answer 2

All parts of an organisation are working towards the same objectives for the organisation

Question 3

What is the budget cycle?

Answer 3

The process that needs to be implemented for a budget. In this order budget preparation, budget approval, nudget implementation, monitoring and evaluation of the budget.

Question 4

What is budget preparation in terms budget cycle?

Answer 4

This involves bringing together data that is required and making all relevant people involved.

Question 5

What is budget approval in terms of the budget cycle?

Answer 5

This is a formal procedure for large organisations and for smaller businesses could be an agreement by relevant managers.

Question 6

What is the budget implementation in terms of the budget cycle?

Answer 6

This means the budget is active from the start of the budget period, all the procedures must adhered to and the responsibility and authority are detailed in the budget.

Question 7

What is monitoring and evaluation of the budget in terms budget cycle?

Answer 7

This is crucial step. The budget should be compared with actual performance and the results reported and acted upon.

Question 8

What are some main types of budget?

Answer 8

Operating budget
Capital budget
Fixed budget
Flexed budget

Question 9

What is an operating budget?

Answer 9

An operating budget is a short to medium budget ( poss a year ) that deals with immediate requirements and initial steps towards a long term strategic budget.

Question 10

What is a capital budget?

Answer 10

The capital budget deals with the acquisition (and disposals) of non current assets that are required to support the organisation.

Question 11

What is a fixed budget?

Answer 11

A fixed budget assumes a certain level of outputs often sales. Then the budget is built around this figure. This is only really appropriate if there is an accurate forecast such as sales contracts.

Question 12

What is a flexed budget?

Answer 12

A flexed budget is where the actual output is used as the base of the budget. Then using knowledge of cost behaviour is adjusted to budget costs in the original fixed budget in line with actual output.

Question 13

What is relevant data?

Answer 13

Relevant data must be collected and identified for budgets that can be taken from internal sources and external sources like accounting info and info about suppliers

Question 14

What are two examples of internal sources of relevant data?

Answer 14

Accounting information
Wage and salary information

Question 15

What is accounting information in terms of internal sources of relevant data?

Answer 15

Includes information about an accounting system (accounting policies) and how they will affect the budget as well as data collected from the accounting system like historic costs

Question 16

What is information about suppliers and availability of inputs in terms of external sources of relevant data?

Answer 16

Information must be available about suppliers ability to supply inputs required. As well as data on relevant prices. This could be used for limiting factors and also force revisions to the budget.

Question 17

What are some examples of relevant data from external sources?

Answer 17

Information about suppliers and availability of inputs
Information about customer and markets
General economic information

Question 18

What is information about information about a customers and markets in terms of external sources of relevant data?

Answer 18

There needs to be a demand for goods, so information of this type is fundamental in developing valid budgets.

Question 19

What is information about general economic information in terms of external sources of relevant data?

Answer 19

The health of the economy is important when preparing a budget like recession e.g when customers have more money to spend on Luxury products etc.

Question 20

What is a limiting factor?

Answer 20

A limiting factor is an issue that determines the level of output. Common factors are size of the market, capacity of premises, the availability of raw materials. This can change during a budget period due to demand or availability or resources.

Question 21

What is the key budget factor?

Answer 21

This is a factor that all aspects of the operation rely on. Normally this is sales, so the level of sales in the budget will affect all the other parts of the budget. This can be another factor like labour being the key factor.

Question 22

What is the a budget manual?

Answer 22

This is an organisations method of budgeting which will be in the policy documents. These include responsibilities and timetables.

Question 24

What is the budget committee?

Answer 24

A budget committee is responsible for the budget procedures normally chaired by the managing director, it will consist of senior representatives from all departments, to ensure there is full understanding of the objectives for the organisation, seen as goal congruence. They set agree and monitor the budget. Must be easy to understand.

Question 26

What is a budget accountant?

Answer 26

A budget account involves preparing the budget, monitoring the budget against actual performance ne and reporting the variances.

Question 27

What are the two types of budget timetables?

Answer 27

Strategic and operational

Question 28

What are strategic budgets?

Answer 28

They are produced well in advance to the period, normally 5 years, they aren’t normally in great detail only outlines information.

Question 29

What is an operational budget?

Answer 29

These are produced for shorter periods of time normally a year, they are in considerable detail, and agreed within a short space of time.

Question 30

What are capital expenditure budgets?

Answer 30

This is expenditure on assets that benefit the company. This could be replacement of equipment or moving property or gaining a new business. A minimum capital expenditure will be set to ensure low value items aren’t being treated as capital, this will be different for smaller and bigger companies.

Question 31

How do you make sure budgeting is effective?

Answer 31

Must be involve honesty, openness and transparency. This means it must be fair for all participants and also seen to be fair. The entire system must be transparent to ensure managers feeling badly treated is minimised. Budgets must not be exaggerated to gain commission or to support one side of the business.

Question 32

What is a participative budget system?

Answer 32

A participative budget system means that those who work to the budget will be involved in its preparation. Sometimes described as a bottom up budget.

Question 33

What are the benefits of participative budgeting?

Answer 33

Those involved will accept the budget and be motivated to work for it Coordination and cooperation between those involved. Helps broaden their experience and develops new skills Better performance due to a more positive attitude to the organisation THIS MUST BE GENUINE THOUGH, IF IGNORED THESE WILL BE OPPOSITE.

Question 34

What is budgetary slack?

Answer 34

Managers have obtained the budget due to overestimation of costs or under estimated of income. Thus more likely to achieve a good level of performance.

Question 35

What are the disadvantages of participative budgeting?

Answer 35

Increases the risk of managers introducing budgetary slack! Coincidental, other variables could benefit the company and this type of budgeting may not be proof. Some employees may not want to spend time on budgeting or feel they may not have the skills to. This could be added pressure rather than an opportunity. Can take longer to consult more people especially if needed in short notice.

Question 36

What is responsibility accounting?

Answer 36

Looking at an organisation in terms of the areas of responsibility, such as functions, responsibility centres.

Question 37

What are the three categories of responsibility centres?

Answer 37

Cost centre Profit centre Investment centre

Question 38

What is a cost centre?

Answer 38

This is a responsibility centre where the manager is responsibility for costs, so has authority in relation to the control of costs. E.g an office manager can authorise the purchase of stationery and introduce controls to reduce wastage of paper.

Question 39

What is a profit centre?

Answer 39

This is a responsibility centre where the manager has responsibility for both costs and income and hence profit. The manage has authority to take action relating to income as well as costs. E.g the manager of a branch of an estate agent may have the authority to negotiate levels of commission with clients as well as deciding on advertising expenses.

Question 40

What is an investment centre?

Answer 40

This is a responsibility centre where the manager is responsible for costs,income and some investments. The managers authority is as for a profit centre with the additional authority to buy and sell assets (but has a limit). This manager has influence over capital employed and return of capital employed. E.g the manager of a division which makes some products of a large manufacturing company may have authority to buy and sell machinery.

Question 41

What is a budget centre?

Answer 41

This is a department, activity, or function for which a budget is prepared and the person is responsible for implementing that budget is the budget holder.

Question 42

What is a controllable cost/income?

Answer 42

This is a particular cost or income that is controllable by a person that can influence it. But doesn’t necessarily mean complete control. E.g cost of boring money is affected by interest rates but decisions relating to amount of borrowing and sources of finance can influence the total cost.

Question 43

What are the fairest ways of measuring performance for budgets?

Answer 43

Controllable costs Controllable profit Return on capital employed

Question 44

What is controllable costs for a measurement?

Answer 44

This is a cost centre which can be worked out using variance an analysis. This for variances on costs he should not include, which they cannot influence like fixed overheads.

Question 45

What is controllable profit for a measurement?

Answer 45

This is a profit centre like profit margin or contribution to sales ratio, as well as variance analysis, ideally avoiding uncontrollable costs.

Question 46

What is return on capital employed for a measurement?

Answer 46

This is an investment centre that measures how well the total capital employed has been used by the manager to generate profits

Question 47

It is important direct costs are recovered appropriately, for a production cost centre that is labour intensive what is appropriate?

Answer 47

An absorption method such as direct labour hours.

Question 48

It is important direct costs are recovered appropriately, for a production cost centre that is machine intensive what is appropriate?

Answer 48

Absorption method such as using machine hours

Question 49

It is important direct costs are recovered appropriately, for a production cost centre that is activity relating what is appropriate?

Answer 49

An activity based costing would be appropriate

Question 50

Name approaches to budgeting.

Answer 50

Incremental budgeting Zero based budgeting Priority based budgeting Activity based budgeting Rolling budgeting Contingency budgeting

Question 51

What is incremental budgeting?

Answer 51

Traditional approach involves using the previous periods budget for the current period and then making adjustments for anticipated inflation or any other expected changes

Question 52

What are the advantages of incremental budgeting?

Answer 52

Consistency throughout Secruirty within departments Can avoid conflict between departments as resources are allocated based on agreed principles

Question 53

What are the disadvantages of incremental budgeting?

Answer 53

No incentives for developing new ideas or reducing costs they may use all budgets to avoid it reducing in future Over time budget may become out of line with amount of work Budgetary slack asking for more budget than necessary

Question 54

What is zero based budgeting?

Answer 54

Each period starts at zero with no account taken of the previous periods budget. Each cost for each department will be justified for the spending amount allocated.

Question 55

What are the advantages of zero based budgeting?

Answer 55

It forces revaluation of activities for each function and how they contribute to the organisations objectives It avoids wastage and budgetary slack It encourages innovations and links the uses of resources

Question 56

What are the disadvantages of zero based budgeting?

Answer 56

The process is time consuming It’s expensive to operate Focuses on short term benefits at the expense of the long term (e.g training/marketing) The judging may be difficult and subjective

Question 57

What is priority based budgeting?

Answer 57

Similar to zero based, it ignores previous budgets. But it examines outcomes that they are attempting to achieve and prioritises them, so allocating resources to outcomes more important.

Question 58

What is activity based budgeting?

Answer 58

Activity based budgeting is often used to manage indirect within the production department. This uses the same cost drivers .

Question 59

What stages does activity based budgets follow?

Answer 59

Activities and cost drivers are first identified The number of units of cost driver that required to complete the required activity level is then forecast The budgeted cost driver rate can then be used

Question 60

What is a rolling budgeting ?

Answer 60

Rolling budgets are continually extended into the future as time goes on. For a yearly budget it could be extended one month every month goes by so that there is always a budget for twelve months in advance.

Question 61

What are contingency budgets?

Answer 61

This is a budget that is designed to allow for unexpected future events and their impact. Most budgets include a contingency element such as future unknown price rises.

Question 62

When coordinating the main types of the budget, what would a sales budget include?

Answer 62

Usually generated directly from the key factor - forecast data

Question 63

When coordinating the main types of the budget, what would a production budget include?

Answer 63

Based on the sqles budget together with the anticipated finished goods inventory levels

Question 64

When coordinating the main types of the budget, what would a materials usage budget include?

Answer 64

Based on the production budget

Question 65

When coordinating the main types of the budget, what would a materials purchases budget include?

Answer 65

Based on materials usage budget together with the anticipated materials inventory levels

Question 66

When coordinating the main types of the budget, what would a labour utilisation budget include?

Answer 66

Also based on production budget

Question 67

When coordinating the main types of the budget, what would a budget include?