8. Budgeting, costing and pricing Flashcards
Name 2 purposes of budgeting for an Organisation
Financial plan that sets revenue and expenditure targets of an organisation for a specified period
To estimate income and expenditure
View of liquid cash flow (month by month)
Plan for capital expenditure
Make managers accountable for their costs/revenue
What is Capital budget
A plan for raising large and long-term sums for investment in Capital (plant/Machinery) over a period greater then the budgeting period being considered
Name a technique used in creating Capital budgets
IRR, NPV, Payback period
What is revenue or turnover
The earnings from the sale of goods and or services (Prior to costs)
What is revenue budget
The amount of money allocated to the maintenance and growth of a business, the result of a business’s forecasts of sales revenue, expenses and capital expeditures
Why should we look at Historical data when budgetting?
So we can forecast trends and budget accorrdingly
What is Capital expenditure (CAPEX)
Spends for long-term use (1yr+) (e.g. Plant equipment)
Give me an example of how can capital be raised
Selling shares
What is revenue expenditure (OPEX)
The expenditure concerned with the costs of doing business on a day-to-day basis
What is responsibility accounting
The measuring of a manager’s performance against their agreed budget, allocating Financial resources to managers, and delegating authority for managing those resources
Using P&L
What is Historical budgeting
When departmental managers justify variances against past years budgets
based on assumption that the ‘baseline’ is automatically approved
For this reason companies may make large expenditures in Q4
What is zero-based budgeting
Budgeting where every line item is approved. During review process no reference is made to previous levels of expenditure.
Every project must be approved
Can businesses work with both Historical and zero-based budgetting
yes
When budgeting why might this be done with departmentalisation?
Division of functions into manageable parts of centres - by function - by product - by region Or a mixture
Management of each division by the independent managers
Allocation of resources by division (incl £)
Responsibility accounting of managers
What is cash flow forecasting
Forward projection (forecast) of bank balance incl cash inflows and outflows
Why do we forecast cash flow
Ensures finance is able to meet day-to-day commitments
Needed by lenders to justify or support forecasting
Manage problems caused by credit sales (lag between doing work and receiving payment - AU relevant!!)
What is bank reconciliation
A process that explains the difference between the bank balance statement provided by bank to an organisation and the organisation’s own accounting records
Why??
Sometimes cheques issued have not been presented to the bank, or bank charge may not have been recorded by organisation
Pending spends may not have been taken out of balance
Steps of Cash flow forecasting
1 - Balance reconciliation
2 - Addition of anticipated receipts
3 - Removal of anticipated expenditure
4 - Calculation of closing balance
Give an example of a direct cost and an indirect cost
Direct cost - Directly associated with product or service (e.g. Bearings, ingredients)
Indirect cost - Not associated to one particular product or service (e.g. Wages, Sales person)
Name some important reasons for costing and pricing reviews
To identify if;
- Price sufficient to cover cost
- Price reductions may prove to be more competitive
- Better to make or buy product
The success of effective costing and pricing depends on management of cost, ensuring revenue is high enough
True/False? A fixed cost is independent of level of sales and will vary over time
True
e.g. Cost of market stall for a market trader, may differ but unaffected by items sold by trader
True/False? Variable costs vary directly with quantity of goods sold.
True, a variable cost is a cost that varies with the quantity of sales
e.g. Cost of tin of beans being sold at market stall
How do we work out our margin on a product?
The markup over the sales price
e.g. Cost = £1, Sales price = £2
Markup(Profit as % of purchase price) = 50%
Margin (Profit as % of sales price) = 50% or £1
What is the breakeven point when selling goods?
how many needed to be sold to make a profit (incl fixed costs)
Fixed cost divided by contribution
What is contribution when selling goods
Contribution = revenue - Variable costs
Fill the blanks
Net income = _____ - _____
Profit = _____ - _____
Net income = Total income - Total expenditure
Profit = Sales price - Cost price
