10 - Budget preparation

Question 1

what are budgets

Answer 1

a plan of action prior to production in a formalised manner

Question 2

formal definition of a budget

Answer 2

financial or quantitative statement approved prior to a defined period of time for the purpose of attaining a given objective

goal congruence

Question 3

purpose of a budget (pneumonic)

Answer 3

PRIME:

P planning
R responsibility
I Integration and co-ordination
M motivation
E evaluation and control

Question 4

what is the budget committee

Answer 4

the co-ordinating body in the preparation and administration of budgets

Question 5

what is a budget manual

Answer 5

a detailed set of guidelines and info about the budget process

Question 6

what is a functional budget

Answer 6

a budget of income/expenditure applicable to a particular function

Question 7

what is the principal budget factor

Answer 7

PBF, or key budget factor, or limiting budget factor

is the factor which limits the activities of an organisation

Question 8

examples of functional budgets

Answer 8

sales budget
production budget
direct material usage
direct material purchases
direct labour budget
factory overhead budget
selling and administration budget
admin expenditure budget

Question 9

financial budgets examples

Answer 9

capital expenditure budget
cash budgets

Question 10

hierarchy of budgets

Answer 10

1. sales budget
2. production budget
   (once we know how many to produce we can produce all other budgets)
3. overhead budget, labour budget, material usage budget, materials purchases budget

Question 11

difference between material usage budget and materials purchases budget

Answer 11

materials purchases budget is adjusted for inventory of raw materials but material usage isn’t

Question 12

difference between sales budget and production budget

Answer 12

production budget is adjusted for opening and closing inventory of finished goods

Question 13

formula to use to calculate one budget figure from another

Answer 13

units made = units sold + units in closing inventory - units in opening inventory

(eg, material purchases = materials usage + closing inventory material - opening inventory material)

Question 14

what is the capital expenditure budget

Answer 14

large, one off payments and should be prepared on a short, medium and long term basis

Question 15

do we include depreciation, revaluation and debts in a cash budget

Answer 15

no, they are accounting adjustments that go in SPL/SOFP

Question 16

what is incremental budgeting

Answer 16

budget is based on current years budget adjusted for estimated growth, inflation or cost savings

Question 17

what is zero based budgeting

Answer 17

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

Question 18

what is a periodic budget

Answer 18

prepared once for each full budget period and used throughout the period

Question 19

what is a rolling budget

Answer 19

budgets prepared every 1,2,3 months

Question 20

what is participative budgeting

Answer 20

gives all budget holders the opportunity to participate in setting their own budgets

Question 21

what is imposed budgeting

Answer 21

involves budgets being set by senior managers without involvement of budget holders

Question 22

advantages of each budgeting method/type

Answer 22

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

Question 23

formula for sales budget

Answer 23

quantity (units) x unit selling price = revenue

Question 24

formula for production budget

Answer 24

sales
+ closing inventory
- opening inventory

Question 25

formula for material usage

Answer 25

production units of each product x quantity of material required

consider wastage

Question 26

formula for material purchases

Answer 26

material usage
+ closing inventory of raw materials
- opening inventory of raw materials

Question 27

formula for labour utilisation

Answer 27

production units x hours required

Question 28

formula for statement of profit/loss

Answer 28

revenue (from sales budget)
- cost of sales (sales unit x cost per unit)
- selling and admin costs