06. Budgets & Performance Reports

Question 1

What is the nature and importance of the Master Budget?

Answer 1

• primary tool for planning and coordinating business activities
• includes all planned activities of a business over the fiscal year
• purpose: to make predictions on cash flows and profit/loss and to help make decisions to meet business goals & objectives.

Question 2

Describe the 3 components of the Master Budget

Answer 2

Operating: day-to-day operations e.g. sales, expenses
Capital Expenditure: investments in non-current assets and associated costs e.g. maintenance & upgrades
Financial: predicting cash inflows and outflows to assess financial position & performance e.g. cash budget, budgeted income statement

Question 3

What is the purpose and function of a Budgeted Income Statement?

Answer 3

• forecasts a business’s expected revenues, expenses, and profits for a specific period.
• helps businesses plan and monitor their financial performance, identify potential problems, and make informed decisions about future investments.
• helps identify expenses that is reducing profitability. (e.g. cost of sales is too high so may need to find cheaper supplier)

Question 4

What is the purpose and function of a Cash Budget?

Answer 4

• predicts future cash inflow and outflows during the budgeted period.
• help avoid potential cash shortfalls or excess cash, ensuring the continuity of business activity and the future financial viability
• plan ahead and source additional short-term credit (e.g. a bank overdraft) to cover short-term cash shortfalls and be able to meet obligations as they fall due
• counteract the anticipated cash shortfall by delaying discretionary (i.e. non- urgent) cash payments (e.g. advertising) and capital expenditure (e.g. new office furniture)

Question 5

What is the purpose and function of Performance Reports?

Answer 5

• helps identify variations in financial performance between budgeted and actual performance.
• helps identify positive and/or negative variances in financial performance.
• can provide corrective action to improve or meet business goals and objectives

Question 6

What is the importance of cash to a business’ viability?

Answer 6

• can affect liquidity/the ability to pay debts
• can invest in the growth of the business
• pay for day-day operations

Question 7

What is the difference between cash and accrual performance?

Answer 7

Accrual: recognizes a transaction at the time the income is actually earned, or expense actually incurred. Example: Rent expense for 3 months only is recognized in the budgeted income statement as this is the actual rent incurred, the cash budget records the cash actually paid for 6 months rent in advance
Cash: recognizes an income transaction when cash is actually received, and an expense is recognized when cash is actually paid. Example: In the budgeted income statement, sales are recognized at the time the sale is made whereas in the cash budget only cash sales and cash paid by debtors is recognised.

Question 8

What is the importance of business planning?

Answer 8

• objective of business strategies include changing goals and performance measurement
• predicting future costs will enable management to avoid cash shortages/excess
• acts as a control mechanism by comparing actual performance against budgeted results; management can determine where improvements need to be made
• Business strategies: Cost leadership (lower price than its competitors) versus cost differentiation (product that is unique/different to competing products)
• a business needs to select the strategy that suits their product and marketplace
• reduces risks and costs by helping management to identify areas not operating efficiently or requiring change.

Question 9

What are some reasons for a favourable variation in Sales?

Answer 9

• increased sales
• increased selling prices
• increased consumer demand for inventory
• decreased competition

Question 10

What are some reasons for a favourable variation in Cost of Sales?

Answer 10

• increased sales leading to an increased COS
• decreased cost of raw materials
• improved production efficiency
• better supplier terms

Question 11

What are some reasons for a favourable variation in Inventory?

Answer 11

• lower supplier prices
• reduced wastage

Question 12

What are some reasons for a favourable variation in Proceeds from sale?

Answer 12

• increased equipment prices relative to when equipment was purchased

Question 13

What are some reasons for a favourable variation in Purchase of Non-current Assets?

Answer 13

• decreased equipment prices when equipment purchased
• cost savings on NCA purchases
• favourable financing terms

Question 14

What are some reasons for a favourable variation in Collection from debtors?

Answer 14

• improved debt management
• debtors paying earlier

Question 15

What are some reasons for an unfavourable variation in Collection from debtors?

Answer 15

• poor debt management
• delayed debt collections
• bad debt write-offs

Question 16

What are some reasons for a favourable variation in Payment to creditors?

Answer 16

• negotiated discounts with creditors
• extended payment terms
• efficient cash flow management

Question 17

What are some reasons for an unfavourable variation in Payment to creditors?

Answer 17

• increased payment obligations
• late payment penalties
• unexpected price increases from supplies

Question 18

What are some reasons for a favourable variation in Expenses?

Answer 18

• cost-saving measures, operational efficiencies

Question 19

What are some reasons for an unfavourable variation in Expenses?

Answer 19

• increased expenses, unexpected costs