B2-budgetary explanations

Question 1

1. what if analysis

Answer 1

1. revise the budgey on the basis of a series of varied assumptions.
2. one or more varibables can be changed at a time to determine the impact on the budgeted profit, cash flow or other aspects of the budget.
   - be able to do this for each of the different variables within the budget and determine the variables to which the profit figure is most sentitive.
   - be able to determine by how much each of the variables can change before we make a loss.

Question 2

2. benefits of what if analysis

Answer 2

1. provides us with more information about the budget`s sentivities to changes in different variables.
2. allows us to make a decision about whether we are prepared to accept the risks involved.
3. alows us to decide whether it is worth spending time and money on further investigation of the market.
4. make contingency plans for the eventuality that … turn out to be much lower than expected.

Question 3

3. limitations of what if analysis

Answer 3

1. it assumes that changes to variables can be made independently however many variables are interdependent. in reality, it is very unlikely that only one variable would change but more likely that there would be changes in a combination of variables.
2. not give us any indication of the likelihood or the probability of that change happening.
3. we could howerver determine the probabilities of different sales volumes and then calculate an expected value for both the sales volume and profit. however, this analysis is very dependent on the accuracy of the probabilities and , as this is a new market for us, these may be difficult to determine without expert advice.

Question 4

4. sensitivity analysis

Answer 4

1. sensitivity ananlysisi involves changing one variable at a time and seeing how this change will affect budgeted profit.-ignore the inter-dependence of the variables.
2. what-if analysis allows more than one variable to be changed at a time and allows us to model all of these potential inter-relationships.

Question 5

5. fixed budget

Answer 5

fixed budget is being used and no account is taken of the actual activity

• a change in level of activity would not cause many problems for cost comparison against our original budget because we would not expect fixed costs to change with the level of activity.
• where there is a variation in activity the results obtained by a fixed budget are not only inaccurate, but they can be dangerously misleading.

Question 6

6. flexible budget

Answer 6

flexible budgeting would allow us to predict the impact of changes in sales volumes on our budgeted profit.
in order to construct a flexible budget, we would neeed to establish our selling price per unit for each type of products and determine whether this selling price would remain constant at different activity levels. we can then determine the sales revenue at different activity levels by multiplying the selling price per unit by the activity level.

Question 7

7. flexible budget

Answer 7

compare the costs that we expect to incur for the actual level of output with the costs that were actually incurred.

• identify which costs are variable, which costs are semi-variable and which costs are fixed.
• since the fixed costs do not change with activity they will remain constant within a relevant range of activity.
• our variablecosts can then be flexed to the level of activiy.
• semi-variable costs have both a fixed and a variable element and we would need to separate these into their fixed and variable elements.
• this can be done using the high-low method or more complicated methods such as linera regression.

Question 8

8. flexible budget

Answer 8

1. show how revenues and variable production costs are affected by the activity level
2. be able to more easily understand the impact of changing circustances.
3. help to undertaken more meaningful performance evaluation and enables us to distinguish genuine efficiencies and inefficiencies.
4. encourage mangement participation in our budget setting process, with the process linked to the various management responsibilities.

Question 9

9. feedforward / feed back control

Answer 9

1. feedback control where actual results are compared to budget.
   - corrective acition is then taken, if necessary, to ensure that costs are conturolled.
2. feedforward control is different in that it involves the comparision of what we expect tho happen with a forecast of what is currently expected to happen based on the latest information.
   - forecasts can be reviewed and changed regularly as circumstances change.
   - enable managers to be pro-active and take control action to prevent the advers situation arising.

Question 10

10. feedforward/feedback control

Answer 10

1. better cost control because we can more quickly identify when issues are arising.
2. foresee possible constraint issues.
3. feedforward conturol is particularly useful for cash forecasting where there is a constant need to look forward and update comparisons. this will be particularly important as we expand and increase investment in working capital.