Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Management Information > 6: Budgeting > Flashcards

6: Budgeting Flashcards

1
Q

What is budgeting?

A

A quantitative expression of a plan of action, in advance of the period to which it relates

A financial plan!

Gives an idea of the costs and revenue that are expected to be incurred or earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What types of budgets are there?

A

Departmental budgets

Functional budgets

Profit or loss account

Cash budgets

Master budget

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the 8 purposes of budgeting?

A

Planning for the future

Controlling costs

Co-ordination

Communication

Motivation

Evaluation

Authorisation

Resource allocation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a budget committee?

A

Responsible for communicating policy guidelines to those who prepare budgets, and for setting/approving budgets

Normally made up of CEO, budget officer, departmental heads

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a budget manual?

A

Sets out instructions relating to the preparation and use of budgets

Details of the responsibilities if those involved in the budgeting process, including an organisation chart, list of budget holders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the principal budget factor?

A

The factor that will limit the activity of an organisation in a given period

The budget for that factor must be produced first

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Four final steps in budget preparation?

A

Initial budgets are prepared - budget slack is built in

Initial budgets are reviewed - integrated into the complete budget system

Master budget is prepared - shown to top management for final approval

Comparison between budgets and actual results - variances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the steps in budget preparation?

A

Sales (or Principal Budget Factor!)

Production Budget
- Raw materials
- Labour
- Factory overhead

CoS budget
Selling and dist expenses budget
General and admin budget

Master budget
- P&L
- Cash
- Balance sheet
- capital expenditure budget

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How to calculate the sales budget?

A

Sales volume x selling price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the calculation for production budget?

A

Sales budget
Closing Inventory
(Opening Inventory)
—————————
Good production
Faulty production
—————————
Total production

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How to calculate the material usage budget?

A

Production budget in kg (closing inventory) x standard material usage per unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How to calculate material purchases budget?

A

Usage budget
Closing Inventory
(Opening Inventory)
————————
@ Standard cost of materials
————————
Budgeted materials cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How to determine labour budget?

A

Total labour hours x labour rate per hour

Answer should be in £

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the master budget?

A

The budget into which all subsidiary budgets are consolidated

Profit or loss
Balance sheet
Cash flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the elements of a budgeted balance sheet?

A

Non-current assets
Current assets
Current liabilities
Net current assets
Net assets
Owner’s capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is sensitivity analysis?

A

Identifiy which budget assumptions have the greatest impact on the budget

And which need to be considered most carefully

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is a cost equation, how is it used, and what one is used most?

A

Derived from historical cost data

Once a cost equation has been established, can be used to estimate future costs

Same formula as linear functions:

y = a + bx

18
Q

Break down the equation of a straight line?

A

Y = a + bx

A - fixed cost per period (intercept)

B - variable cost per unit (gradient)

X - activity level (independent variable)

Y - cost, total and fixed (dependent variable)

19
Q

What are the two ways of analysing semi-variable costs into their fixed and variable elements?

A

High-low method

Linear regression

20
Q

The four steps of calculating the high low method?

A
  1. Determine the highest and lowest activity levels and their associated costs
  2. Find the variable cost per unit

Increase in cost / increase in activity

  1. Find the fixed cost

One semi-variable cost - (variable cost PU x activity level)

  1. Calculate any expected costs

Fixed costs + (variable costs PU x activity level)

21
Q

Disadvantage of the high-low method?

A

Only takes into account two sets of data, which is not wholly representative

22
Q

What is linear regression, and what are the ads and dis?

A

Uses mathematical equations

Superior to high low method because it takes all data sets into account

Ads:
- all data points taken into account

Dis:
- assumes that historical behaviour of data goes into foreseeable future
- predictions only reliable it there is significant correlation

23
Q

What is correlation, and how is it measured?

A

Strength of a connection between two variables

Two variables are correlated if a change in one variable brings about a change in another

Measured by drawing a scatter graph and drawing a line of best fit

24
Q

What are the three outcomes of degrees of correlation?

A

Perfect - all values would lie on a straight line. Linear relationship

Partial - no exact linear relationship, but variables tend to be associated with other

Uncorrelated - no correlation

25
Q

Difference between positive and negative correlation?

A

Positive
- high values with one variable are associated with high variable of the other
- or vice versa

Negative
- high values of one variable associated with low values of other

26
Q

What is the correlation coefficient?

A

Alternative to drawing graph to determine if two variables are correlated

Strength of a linear relationship between two variables

-1 perfect negative
0 no correlation
1 perfect positive

27
Q

What is the coefficient of determination?

A

Square of correlation coeffecient

How much of the variation in the DEPENDENT variable is ‘explained’ or linked by variation in the independent variable

Closer to 1, stronger the correlation is

Remaining amount in random fluctuations

28
Q

Two limitations of correlation?

A

Correlations could be misleading on sample data
- sampling error
- why correlation must be accompanied by a significance test to assess its reliability

Correlation and casualty are not the same thing
- correlation does not imply that one variable causes the other

29
Q

What is a time series analysis?

A

Uses moving averages to create a trend line over time

When adjusted for seasonal variations can be used to make predictions for the future

30
Q

What three kinds of variations needs to be considered in a Time Series Analysis?

A

Cyclical variations - economic cycles of booms and slumps

Season variation - regular variations around the trend over a fixed time period, usually a year

Residual variations - irregular, random fluctuations

31
Q

What are three ways to calculate the trend for a time variance analysis?

A

High low

Linear regression

Moving averages

Trend can be extrapolated once its been found!

32
Q

How to calculate moving averages?

A

Used to smooth out the variations

  1. Choose a correct cycle length
  2. Calculate the total for the first cycle
  3. Calculate the average by dividing the total by the no. of periods in the cycle
  4. Repeat for the next cycle, and so on
33
Q

How are seasonal variations calculated?

A

How much the data varies from the trend line

Seasonal variance is the difference between the trend line value and the actual historical value

Trend can be extrapolated and variations can be applied

34
Q

What are the two methods for calculating seasonal variations?

A

Additive model:
Trend line value + seasonal variation
Absolute number

Multiplicative model:
Trend line value / seasonal variation x 100
Percentage change

35
Q

Three limitations of time series analysis?

A

Assumption that what happening in the past is a reasonable guide to the future

Assumption straight line trend exists

Assumption that seasonable variations are constant

36
Q

What are the two types of budget in terms of participative?

A

Top down budget
- set without the budget holder being allowed to participative
- imposed budget, or non-participative

Bottom up budget
- budget holders have the opportunity to participate
- participative budgeting

37
Q

Advantages of participative budgets?

A

Increased motivation

Contains better information

Increases managers understanding and committment

Better communication

Senior managers can concentrate on strategy

38
Q

Disadvantages of participative budgets?

A

Senior managers resent loss of control

Bad decisions from inexperienced managers

Budgets not in line with objectives

Preparation is slower an disputes can arise

Figures may be subject to bias as they add budget slack

Create create environments that preclude participation

39
Q

3 extra budget types?

A

Continuous/rolling budget
- prepared a year ahead and updated regularly by adding a further accounting period
- will always reflect the budget a year in advance

Incremental budget
- uses the previous period’s budget as a starting point, then adds ‘increments’ as it sees necessary

Zero-based budget
- starts the budgeting process from zero because it takes nothing for granted

40
Q

What is beyond budgeting?

A

Idea that companies need to move beyond budgeting because of inherent flaws in budgeting

  • used in orgs that face enviro changes
  • greater use of rolling budgets and non-financial targets
  • targets are based on externally-observed benchmarks
  • innovation is encouraged and rewarded
  • budgets is set locally
  • inspire workers though bold and noble causes

Management Information (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions