6. Budgeting

Question 1

What is a budget?

Answer 1

A financial and/or quantitative expression of a plan for a defined period of time.

Question 2

What are the 5 benefits of a budget?

Answer 2

1. Control
2. Responsibility
3. Integration (helps communication and co-ordinating)
4. Motivation
5. Evaluation

Question 3

What is the principle budget factor?

Answer 3

The principle budget factor limits the activities of an undertaking - it is the starting point in the budget setting process.

Question 4

What is most commonly the PBF?

Answer 4

Sales

Question 5

What is the order of steps of preparation of a budget?

Answer 5

PFB -> Production Budget -> Individual Production Budgets -> Cost of Sales Budget -> Master Budget (includes selling/distribution and administration costs)

Question 6

What documents are included in the master budget?

Answer 6

P&L, Cash Budget, SFP

Question 7

What is a cash budget?

Answer 7

A detailed budget of estimated cash inflows and outflows, incorporating both revenue and capital items

Question 8

What steps might be taken if a potential cash shortage is identified?

Answer 8

Organise an overdraft, offer customers a discount to pay early, delay supplier payments, or raise other finance

Question 9

What steps might be taken if a potential cash surplus is identified?

Answer 9

Offer more generous terms, arrange to pay off some finance, or organise to put surplus on deposit on the money market

Question 10

Why do capital expenditure purchases have an impact on the P&L?

Answer 10

Need to charge depreciation to the P&L

Question 11

What is the role of the budget committee?

Answer 11

Co-ordinate the preparation and admin of budgets

Question 12

What is budgetary slack?

Answer 12

Managers try to overestimate expenses or underestimate revenues in their budgets to ensure that they meet their targets

Question 13

What is a periodic budget?

Answer 13

A budget that shows the costs and revenue for one period of time and is updated for each period.

Question 14

What is a rolling budget?

Answer 14

A budget which, having been established at the beginning of the period, is then constantly amended and extended

Question 15

What are the uses of a rolling budget?

Answer 15

At times of uncertainty, revisions to inputs will result in better information for control and decision making purposes, as well as encouraging staff to look constantly

Question 16

What are the problems with rolling budgets?

Answer 16

They involve a lot of time and effort, the concept is not readily understood and continually moving the goalposts can lead to de-motivation

Question 17

What are incremental budgets?

Answer 17

A system whereby the budget for the forthcoming period is calculated by taking the current budget or actual results and adjusting for changes such as anticipated inflation and growth.

Question 18

What are the main uses of incremental budgets?

Answer 18

The budget is stable and change is gradual, managers can operate their departments on a consistent basis, the system is relatively simple and quick to operate, easy to understand, impact of change can be seen quickly

Question 19

What are the main problems with incremental budgets?

Answer 19

They assume that activities will continue in the same way, no incentive for developing new ideas, no incentive to reduce costs, encourage spending up the the budget so that the budget is maintained next year, may become out of date and no longer relate to the level of activity, priorities may change, budgetary slack may never be reviewed

Question 20

What is a zero based budget?

Answer 20

One which requires managers to justify every item of expenditure even if that items has been accepted in previous periods

Question 21

What are the main uses of zero-based budgets?

Answer 21

• Responsive to change in economic environment
• Result in efficient allocation of resources
• Drive managers to find out cost effective ways to improve operations
• Detect inflated budgets
• Increase staff motivation by giving responsibility
• Increase communication and co-ordination

Question 22

What are the main problems with zero-based budgets?

Answer 22

• Difficult to define decision units, time consuming
• Difficult to rank decision packages
• Difficult to justify long term expenditure
• Need to train managers
• Large volume of data
• Honesty of managers must be reliable
• Ranking process could cause conflict

Question 23

What is a top down (imposed) budget?

Answer 23

Set by starting with the overall corporate objective set by the senior management and then working down through the different levels of the organisation

Question 24

What is a bottom up (participative) budget?

Answer 24

Set by starting with the individual personal and departmental objectives set by the local management and then working up through the levels