8. Budgeting, costing and pricing

Question 1

Name 2 purposes of budgeting for an Organisation

Answer 1

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

Question 2

What is Capital budget

Answer 2

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

Question 3

Name a technique used in creating Capital budgets

Answer 3

IRR, NPV, Payback period

Question 4

What is revenue or turnover

Answer 4

The earnings from the sale of goods and or services (Prior to costs)

Question 5

What is revenue budget

Answer 5

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

Question 6

Why should we look at Historical data when budgetting?

Answer 6

So we can forecast trends and budget accorrdingly

Question 7

What is Capital expenditure (CAPEX)

Answer 7

Spends for long-term use (1yr+) (e.g. Plant equipment)

Question 8

Give me an example of how can capital be raised

Answer 8

Selling shares

Question 9

What is revenue expenditure (OPEX)

Answer 9

The expenditure concerned with the costs of doing business on a day-to-day basis

Question 10

What is responsibility accounting

Answer 10

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

Question 11

What is Historical budgeting

Answer 11

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

Question 12

What is zero-based budgeting

Answer 12

Budgeting where every line item is approved. During review process no reference is made to previous levels of expenditure.

Every project must be approved

Question 13

Can businesses work with both Historical and zero-based budgetting

Answer 13

yes

Question 14

When budgeting why might this be done with departmentalisation?

Answer 14

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

Question 15

What is cash flow forecasting

Answer 15

Forward projection (forecast) of bank balance
incl cash inflows and outflows

Question 16

Why do we forecast cash flow

Answer 16

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!!)

Question 17

What is bank reconciliation

Answer 17

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

Question 18

Steps of Cash flow forecasting

Answer 18

1 - Balance reconciliation
2 - Addition of anticipated receipts
3 - Removal of anticipated expenditure
4 - Calculation of closing balance

Question 19

Give an example of a direct cost and an indirect cost

Answer 19

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)

Question 20

Name some important reasons for costing and pricing reviews

Answer 20

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

Question 21

True/False? A fixed cost is independent of level of sales and will vary over time

Answer 21

True

e.g. Cost of market stall for a market trader, may differ but unaffected by items sold by trader

Question 22

True/False? Variable costs vary directly with quantity of goods sold.

Answer 22

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

Question 23

How do we work out our margin on a product?

Answer 23

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

Question 24

What is the breakeven point when selling goods?

Answer 24

how many needed to be sold to make a profit (incl fixed costs)
Fixed cost divided by contribution

Question 25

What is contribution when selling goods

Answer 25

Contribution = revenue - Variable costs

Question 26

Fill the blanks

Net income = _____ - _____

Profit = _____ - _____

Answer 26

Net income = Total income - Total expenditure

Profit = Sales price - Cost price