5. Preparing Budgets Flashcards
What are standard costs?
That are what things ‘should cost’. They enable managers to make timely decisions so they can monitor and control their business effectively and therefore make estimates of the expected costs.
What are the standard costs?
> Ideal standards = Impossible target
Attainable standards = More realistic target
Basic standard = Not very meaningful target
Current standard = No incentive to improve, everything remains the same.
How can the use of standard costs help with planning?
By producing comprehensive cost budgets for the period
How can the use of standard costing help with control?
That form the basis for any variance analysis, the standard cost acts as a benchmark for comparison
What is the marginal cost?
Variable production cost
What is the absorption cost?
The full production cost
What are the advantages of standard costing?
- Budgeting can be quicker and more accurate
- Useful for setting selling prices, expected prices are covered
- Used to set targets for individual staff
- Makes measurement of the performance easier
- Valuing inventory is simpler
What are the disadvantages of standard costing?
- Time-consuming to create and keep up to date
- need to be updated regularly due to changing conditions
- De-motivating for staff if wrong standard used
- Difficult to establish if no comprehensive cost info
What is the principle budget factor?
The factor that limits the growth in sales that an organisation can achieve. Once the PBF has been set, the other functional budgets can be prepared.
What is the hierarchy of functional budgets?
- Sales budget
- Production budget
- Raw material, labour and production overhead budgets
- Cost of sales budget
- Selling and distribution cost, and general and administration cost budgets
- Budgeted statement of profit or loss
- Capital expenditure - cash flow budget
- Budgeted balance sheet
What additional factors that need to be considered when preparing functional budgets?
- Opening and closing inventory of finished goods
- Defective units of output
- Opening and closing inventory of raw materials
- Wastage of raw materials
- Idle labour time
How do you prepare a cash budget?
- Enter one-off payments and receipts
- Enter wages / salaries paid in the month
- Deal with receipts from sales
- Deal with payments for purchases
- Calculate the net cashflow for each month
- Calculate the closing balance
What do you do if you identify a potential cash flow deficit?
- Organise an overdraft facility with the bank
- Offer customers a settlement discount to pay early
- Delay payment to suppliers
- Delay capital expenditure
- Raise finance
What to do if you identify a potential cash flow surplus?
- Offer more generous terms to customers
- Pay off exhibiting finance
- Invest the surplus
What is the calculation for machine utilisation?
(Machine hours required / machine hours available) X 100
