Aspect of budgeting Flashcards
What is a budget ? P231
- Financial plan - prepared in advance
What are budgets based on , and what is this thing referred to as? p231
- Pre-determined costs and revenue
- standard costs
- standard selling prices
What are budgeted/ standard costs and revenue set for ?
- direct material
- direct labour
- production overheads
- sales revenue
- operating profit
What would concern direct materials for budgeted/ standard costs ? P231
- Quantity and quality
- price
- expected quantity and quality * expected material price= budgeted material costs
What would concern direct labour for budgeted/standard costs ? P231
- Labour hours
- costs of labour
- expected labour hours * expected wage rates= budgeted labour costs
What are production overheads iin the context of budgeted / standard costs and revenue ? P231
expected volume of output * OAR
What is the sales revenue in relation to the budgeted / standard costs and revenue ? P231
- Expected volume of sales * expected selling price
What is the operating profit in relation to budgeted/ standard costs and revenue ? P231
Sales revenue - direct materials/ labour / production overheads =Expected operating profit
What is decision making in relation to budgeted/ standard costs and revnue ? P231
- Pricing decisions
- considers effect - quality of material and grade of labour - costs of output
What is planning in the context of budgeted/ standard costs and revenue ? P231
- budgets - plan the production - goods/services- for the next accounting period
- budgets for - materials, labour, overheads, operating profit
What is control in the context of budgeted/ standard costs and revenue ? P231
- Identify -cost and revenue variance
- reconciliation of budgeted and costs, revenue , operating profit
What is a fixed budget ? P232
- Budget - same regardless of output
- set - beginning of time period
- do not change
What is a flexible budget? P232
- Budget - changes with activitity
- different cost behaviour patterns
How does a flexible budget work? P232
- Altered - control purposes
- vary - line with level of activity
- right costs and revenue matched
- variance calculated
What to remember about the cost per unit when calculating the sales revenue and vairable costs for a flexbile budget ? P233
Cost per unit - unchanged
total revenue/ costs - ‘flexed’ to level of acitvity
What are the three overheads in relation to making a product or providing a service in relation to fixed and flexible budgets ? P233
- fixed overheads
- variable overheads
- semi variable overheads
What will happen to fixed overheads when preparing a flexible budget ? P233
- will not change due to changes in level of output
- may change- pricing
- increase in fixed overheads = actual costs to budgeted figures
What must you compaare for an increase in fixed overheads whne looking at flexible budgets ? P233
- Actual costs - compared with budget figure
How can the business increase profit ? P233
- Alter balance - fixed and variable costs
What type of costs is a labour intensive process of production likely to incurr ? P233
- High variable costs (direct labour)
- Low fixed costs ( straight line depreciation)
What type of costs is an automated process likely to incurr ? P233
- Low variable costs (labour costs)
- High fixed costs (straight-line depreciation)
What can a knowledge of the behaviour of costs be used to help management with ? P234
- fixed costs in semi variable costs
- Prep - flexible budgets for revenue and costs
- Identify - break even point
Why mist fixed and variable costs within semi variable costs be identified ? P234
- Budgeting
- decision making
Where the total costs are known at two levels of output , how can the amount of fixed and variable costs be identified ? P234
- High/low method
- costs difference at different output levels = variable costs
When can the high low method only be used ? P234
- Variable costs increase - same money amount , each extra unit
- constant unit variable costs
- no stepped fixed costs
What are the steps for claculating the high low method ? P234
- Step 1: High output/ costs - low output costs
- Step 2 : difference costs/ difference in unit = variable cost per unit
- Step 3 : total costs - variable costs = fixed costs
- Step 4 : Calculate/ check output at higher rate : variable costs +fixed costs = semivariable (previously advised )
How are many budgets set out , to show ? P237
- Contribution to fixed costs
What is the definition of a variance ? P239
- Difference - budgeted/ standard costs or revenue and actual costs or revenue
How are budgets used as a maethod of costs and revenue controll ? P239
- Comparing - budgeted costs / revenue with actual costs/ revennue
- establish variance
How cna variances be denoted ? P239
- Favourable
- Adverse
What are favourable variances ? P239
- Favourable costs - Actual costs lower than budgeted costs
- Favourable revenue - actual revenue higher than budgeted
- Favourable ioperating profit - actual profit higher than budgeted profit
What are adverse variances ? P239
- Adverse costs = actual costs > budgeted costs
- Adverse revenue = actual revenue < budgeted revenue
- Adverse operating profit = actual profit < budgeted profit
How would management act on variances ? P239
- Management by exception
- Tolerance limits
- tolerance limit exceeded = significant variance & action to be taken
How are the varianceas for costs elements and sales revenue reported ? P240
- Summarised - budget report
- reconciliation - budgeted costs/ revenue and actual costs/revenue
How does the buudget report show a variance for revenue and each costs element ? P241
- Comparing
- Percentage
How are percentages in variance calculated ? P241
- Variance / budgeted figure
- sales revenue
- direct materials
- direct labour
- variable overheads
- fixed overheads
What effect do variances have on the operating profit ? P241
- Favourable revenue - increases profit
- adverse revenue - reduces profit
- favourable cost- increases porfit
- adverse costs - reduces profit
What happens between revenue & costs variances and operating profit variance in the budget report ? P241
- Revenue and costs variances - reconciled - operating profit variance
- net amount variances for costs and revenue = operating profit variance
What is the order for investigating variances shown in the budget report ,using either money amounts or percentages, shown as ? P241
- Large variances - favourable and adverse
- other- adverse variances
- any remaining - favourable variances
Why would constant adverse/ favourable variances need to be investigated ? P242
- budget incorrectly set up
How can budgeted reports be used effectively ? P242
- Record information accurately
- accurate
- timely
- appropriate - format, highlighting , major features
Why would budgeted reports need to be revised ? P242
- Inflation = costs increase
- change- specification / quality of materials = less wastage
- work practice change
- selling price change - competition
What are controllable costs & revenue ?
- Influenced by manager/ supervisor
- e.g. purchasing manager - costs of materials
What are non-controllable costs and revenue ? P243
- Costs not influenced by manager/supervisor - short term
- e.g. rent
Are all costs controllable or non-controllable in the long term? P243
- Controllable
- rent - move premise
- stop trading
Why woul;d budgets concern managers? P245
- Suitable targets aim for
- investigation - causes of the variance
How can a direct material vairnace be resolved ? P246
- Reducing material wasted
- Buying material - cheaper price
- Training staff - material used more efficiently
How can an adverse direct labour variance be resolved ? P247
- Training staff - efficiency
- lower grade labour
- production process reorganisation
How can an adverse overhead variance be resolved ? P247
- Cheaper suppliers
- efficient use of overheads
- production process changes- labour and machine work balance
What is a rolling budget ? P247
- Up-to-date
- adding new budget period - recent budget period completed
- Moving annual total (MAT)
