Budgetary Planning and Control

Question 1

Planning

Answer 1

Involves developing objectives and preparing various budgets to achieve these objectives.

Question 2

Control

Answer 2

Involves the steps taken by management that attempt to ensure the objectives are maintained.

Question 3

Advantages of Budgeting

Answer 3

• Control Activities
• Motivate Managers
• Communicate Plans
• Co-ordinate Activities
• Think about and plan for the future
• Evaluate performance of managers

Question 4

Responsibility Accounting

Answer 4

Managers should only be held responsible for those items, and only those items, that the manager can actually control to a significant extent.

Question 5

Operating Budget

Answer 5

The annual operating budget may be divided into quarterly or monthly budgets.
Finishes at the end of each calendar year.

Question 6

Continuous or Perpetual Budget

Answer 6

This budget is usually a 12 month budget that rolls forward one month as the current month is completed.
eg will move from 2009 into 2010.

Question 7

Participative Budget System (Flow of budget data)

Answer 7

Top Management
↑
Middle Management ———Middle Management
↑ ↑
Supervisor——-Supervisor Supervisor——Supervisor

arrows also up from supervisors to top management

Question 8

Budget Committee

Answer 8

Standing committee responsible for:

• Overall policy matters relating to the budget
• Coordinating the preparation of the budget

Question 9

The Master Budget

Answer 9

Sales Budget—————————
↓ ↓
Ending Stock Budget↔Production Budget ↓
↓ ↓
Direct Labor Budget ↓
↓ ↓
Cash Budget ←———————-

                                   Sales Budget
                                             ↓   
                             Production Budget  
                          ↙               ↓                   ↘
Direct Materials         Direct Labour        Manufacturing OH
            Budget              Budget                    Budget  
                   ↘                   ↓                            ↙  
                                Cash Budget

←←←←←←←←←←← Sales Budget←←←←←←←←←
↓ ↓
↓ Selling and administrative Budget
↓ ↓
↓ ↓
→→→→→→→→→ Cash Budget←←←←←←←←←←←

Budgeted Financial Statements

Question 10

The Sales Budget

Answer 10

Detailed schedule showing expected sales for the coming periods expressed in units and £.

Columns are months and then overall quarter.

Budgeted sales (Units)
x
Sales price per unit
=Total Sales

Question 11

The Production Budget

Answer 11

Sales Budget (Completed)→Production Budget

Production just be adequate to meet budgeted sales and provide for sufficient ending stock.

Desired ending stock for first month becomes beginning stock for next month.

Overall for the quarter -
Desired ending stock comes from the last month in the quarter.
Beginning stock comes from first month in the quarter.

Question 12

Production Budget Layout

Answer 12

Columns are months and then overall quarter.

Budgeted Sales + Desired Ending Stock
=Total needed
-
Beginning Stock
=Required Production

Question 13

Desired Ending Stock (Production Budget)

Answer 13

Budgeted Sales x Desired % (as decimal) = Desired Stock

Question 14

Expected Cash Receipts

Answer 14

All sales are on account.
Collection patter of cash.
Columns are month and overall quarter.
Each months sales split into collections.
Total cash collections.

Question 15

Direct Materials Budget

Answer 15

Columns are months and overall quarter.

Production (from production budget)
x
Materials Per Unit
=Production needs
\+
Desired ending stock
=Total needed
-
Beginning Stock
=Materials to be purchased.

Question 16

Expected Cash Disbursement for Materials

Answer 16

Columns are months and overall quarter.

Months purchases split into different payments.
Months purchases - Materials to be purchased (from end of direct materials budget) x payment per £ for material.

Months purchases for each month.

Total Cash Disbursements.

Question 17

Direct Labour Budget

Answer 17

Columns are months and overall quarter.

Production (from production budget)
x
Direct labour hours (how many hours each unit of production requires)
=Labour hours required
Guaranteed labour hours
Labour hours paid (whichever is higher out of labour hours required or guaranteed labour hours).
x
Wage Rate
=Total direct labour cost

Question 18

Manufacturing overhead budget

Answer 18

Columns are months and overall quarter.

Production in units (from production budget)
x
Variable manufacturing OH rate (£ per unit produced)
=Variable manufacturing OH costs
+
Fixed manufacturing OH costs
= Total manufacturing OH costs
-
Non cash costs (included in the fixed manufacturing OH costs. Depreciation is a non cash charge).
=Cash disbursements for manufacturing OH.

Question 19

Closing finished goods stock budget

Answer 19

Production costs per unit -
Columns are Quantity, Cost £ and Total £ (quantity x cost)

Direct materials (quantity - £ of material required per unit of product, cost - material cost £ per pound.

Direct labour (from direct labour budget, quantity - direct labour hours i.e. number of hours needed to complete one unit, cost - wage rate)

Manufacturing overhead (quantity - hours needed to complete one unit, cost - total manufacturing OH for quarter(from manufacturing overhead budget)/total labour hours required (from direct labour budget)) rounded)

Total (only in total column) £ - unit product cost

Budgeted finished goods stock-
Closing stock in units (production budget)
x
Unit product cost
= Closing finished goods stock

Question 20

Selling and administrative expense budget

Answer 20

Columns are months and overall quarter.

Budgeted sales
x
Variable selling and admin rate (expenses £ per unit sold)
=Variable expense £
\+
Fixed selling and admin expense
=Total expense
-
Non-cash expenses (included in fixed costs)
=Cash payments for selling and admin

Question 21

The cash budget

Answer 21

Columns are months and overall quarter.

Opening cash balance
\+
Cash receipts
=Total cash available
-
Total Disbursements:
(Materials
\+Direct labour
\+Manufacturing overhead
\+Selling and admin
\+Equipment purchases
\+Dividends
=Total disbursements)
=Closing cash balance

Question 22

Financing and Repayment

Answer 22

Columns are months and overall quarter.

Excess (deficiency) of cash available over disbursements
\+
Total Financing:
(Borrowing
\+Repayments
\+Interest (Borrowing x % annual repayment x 3/12 (amount due for three months)
=Total financing)
=Ending cash balance

Question 23

Weaknesses of traditional budgeting

Answer 23

• Time consuming.
• Constrain responsiveness.
• Rarely strategically focused.
• Add little value given time required to prepare them.
• Concentrate on cost reduction, not value creation.
• Strengthen vertical command-and-control.
• Do not reflect emerging network structures.
• Encourage gaming.
• Updated too infrequently.
• Based on unsupported assumptions and guesswork.
• Reinforce departmental barriers.
• Make people feel undervalued.

Question 24

Practice Developments in budgeting the beyond budgeting approach

Answer 24

Beyond budgeting group recommends radically changing traditional budget based performance evaluation or completely eliminating budget process.

• Base goals on external benchmarks
• Base evaluation and rewards on relative improvement contracts.
• Make action planning a continuous and inclusive process.
• Coordinate cross-company actions.
• Base controls on a range of relative performance indicators.

Question 25

Standard Costs

Answer 25

Based on carefully predetermined amounts.

Used for planning labour, material and overhead requirements.

The expected level of performance.

Benchmarks for measuring performance.

Graph -
y axis amount
x axis type of product cost
x=constant

Question 26

Management by exception

Answer 26

Managers focus on quantities and costs that exceed standards.

Question 27

Setting standard costs

Answer 27

Accountants, engineers, personnel administrators and production managers combine efforts to set standards based on experience and expectation.

Question 28

Practical standards

Answer 28

Set at levels that are currently attainable and reasonable with efficient effort.

Question 29

Ideal standards based on perfection

Answer 29

Unattainable and discourage most employees.

Question 30

Setting direct material standards

Answer 30

Price standards→Final, delivered cost of materials, net of discounts.

Quality standards→Use product design specifications.

Question 31

Setting direct labour standards

Answer 31

Rate Standards→Use wage surveys and labour contracts.

Time standards→Use time and motion studies for each labour operation.

Question 32

Setting variable overhead standards

Answer 32

Rate Standards→The rare is the variable portion of the predetermined overhead rate.

Activity standards→The activity is the base used to calculate the predetermined overhead.

Question 33

Standard cost card - variable production cost

Answer 33

For one unit of product.

Columns are

• Inputs
• Standard quantity of hours (A)
• Standard price or Rate (B)
• Standard cost per unit (AxB)

Direct materials
Direct labour
Variable manufacturing overhead
Total standard unit cost (last column only).