Budgetary Control

Question 1

Fixed Budget definition

Answer 1

A budget that provides a predetermined financial plan that remains unchanged regardless of fluctuations in activity levels. Provides the basis for performance evaluation.

Question 2

How are fixed budgets set?

Answer 2

They are normally established in advanced based on management’s best estimates of future costs and revenues. They are usually determined through forecasting techniques, historical data analysis, and managerial judgment.

Question 3

Flexible Budget

Answer 3

Is a financial plan that adjusts to varying levels of activity or output within a certain period. Unlike a fixed budget, which remains unchanged regardless of activity levels, a flexible budget recalculates budgeted amounts based on the actual level of activity achieved

Question 4

How do you prepare flexible and flexed budgets?

Answer 4

1.) Determine cost behaviour patterns - Fixed, Variable, semi-variable.
2.) Fixed cost will remain the same as activity levels change.
3) If cost is linear variable cost the cost per unit will remain constant if not the rate will reduce as activity levels increase.
4)Split semi variable cost into their fixed and variable components using either the high low method or scatter graph method.
5) Calculate the budget cost allowance for each cost item as budget cost allowance = Budgeted fixed cost + (volume X variable cost per unit)

Question 5

What are the benefits of a flexible budget?

Answer 5

1.) Adjust to Activity levels
2.) Reflects realistic Expectations
3.) Variance analysis becomes more effective
4.) More meaningful performance evaluation.
5.) A better decision making tool