10 - Budget preparation Flashcards
what are budgets
a plan of action prior to production in a formalised manner
formal definition of a budget
financial or quantitative statement approved prior to a defined period of time for the purpose of attaining a given objective
goal congruence
purpose of a budget (pneumonic)
PRIME:
P planning
R responsibility
I Integration and co-ordination
M motivation
E evaluation and control
what is the budget committee
the co-ordinating body in the preparation and administration of budgets
what is a budget manual
a detailed set of guidelines and info about the budget process
what is a functional budget
a budget of income/expenditure applicable to a particular function
what is the principal budget factor
PBF, or key budget factor, or limiting budget factor
is the factor which limits the activities of an organisation
examples of functional budgets
sales budget
production budget
direct material usage
direct material purchases
direct labour budget
factory overhead budget
selling and administration budget
admin expenditure budget
financial budgets examples
capital expenditure budget
cash budgets
hierarchy of budgets
- sales budget
- production budget
(once we know how many to produce we can produce all other budgets) - overhead budget, labour budget, material usage budget, materials purchases budget
difference between material usage budget and materials purchases budget
materials purchases budget is adjusted for inventory of raw materials but material usage isn’t
difference between sales budget and production budget
production budget is adjusted for opening and closing inventory of finished goods
formula to use to calculate one budget figure from another
units made = units sold + units in closing inventory - units in opening inventory
(eg, material purchases = materials usage + closing inventory material - opening inventory material)
what is the capital expenditure budget
large, one off payments and should be prepared on a short, medium and long term basis
do we include depreciation, revaluation and debts in a cash budget
no, they are accounting adjustments that go in SPL/SOFP
what is incremental budgeting
budget is based on current years budget adjusted for estimated growth, inflation or cost savings
what is zero based budgeting
alternative to incremental budgeting, starts from basic premise that next years budget is zero
every process or item of expenditure must be justified in entirety before included in budget
what is a periodic budget
prepared once for each full budget period and used throughout the period
what is a rolling budget
budgets prepared every 1,2,3 months
what is participative budgeting
gives all budget holders the opportunity to participate in setting their own budgets
what is imposed budgeting
involves budgets being set by senior managers without involvement of budget holders
advantages of each budgeting method/type
incremental = easy, quick, cheap
zbb = identify efficiencies and remove
periodic = target to work towards
rolling = update for uncertainties, forward looking
participative = local focus/improved accuracy, increased motivation
imposed = goal congruence, decreased risk of budgetary slack
formula for sales budget
quantity (units) x unit selling price = revenue
formula for production budget
sales
+ closing inventory
- opening inventory
formula for material usage
production units of each product x quantity of material required
consider wastage
formula for material purchases
material usage
+ closing inventory of raw materials
- opening inventory of raw materials
formula for labour utilisation
production units x hours required
formula for statement of profit/loss
revenue (from sales budget)
- cost of sales (sales unit x cost per unit)
- selling and admin costs
