Budgeting

Question 1

What is budgeting

Answer 1

A budget is a financial plan for a business, prepared in advance​

Question 2

What is Zero Based Budgeting

Answer 2

start from scratch every time​

Question 3

What is Incremental Budgeting

Answer 3

Previous budget figure are used as a basis and a small percentage added on.​

added on due to inflation & cost of living

Question 4

What are the 7 types of budgeting (cspplm)

Answer 4

cash
sales
Production
purchases
labour
master budget

Question 5

How are budgets used in Planning control

Question 6

Budgetary control

Answer 6

Budgeted figures -> actual figures -> monitor and compare -> control and take action -> Budgeted figures

Question 7

Variances

Answer 7

Favorable - when results are better than expected

Adverse - When results are worse than expected

Question 8

Advantages of Incremental budgeting

Answer 8

Quick and easy

Suitable for stable business’

Question 9

Disadvantages of incremental budgeting

Answer 9

Mistakes remain on the budget​

Complacencies could set in​

Budget holders are not really incentivised correctly – what you spend this year will be next years budget​

Question 10

Advantages and disadvantages of Zero Based budgeting

Answer 10

Advantages​:

Everything is justified​
Budgets carefully linked to business objectives​
A range of staff are involved in creating them (motivation)​
Mistakes and overspending are more likely to be avoided​

Disadvantages​

Very time consuming (demotivation)​
Much harder to do (training)​
Expensive to prepare (cost effective?)​
Short sighted lots of effort in next year – what about after that?)​

Question 11

Benefits of Budgetary control

Answer 11

Planning​
Co-ordination (hard to do)​
Control​
Communication​
Motivation​
Evaluation of performance​
Decision making

Question 12

Disadvantages of Budgetary control

Answer 12

Costs vs benefits​
Accuracy​
Demotivation​
Dysfunctional management if not coordinated properly​
Set too easy​
May restrict activity

Question 13

Sales Budget

Answer 13

A sales budget is the starting point for budgetary planning. It plans the projected sales of:​
Products made by a manufacturing business ​

Services provided by a service business

Question 14

Purchases Budget

Answer 14

Required to determine the amount of purchases​

A completed Sales Budget is needed for the completion of a Purchases Budget​

Question 15

Production Budget

Answer 15

Prepared to determine what the level of production will be to fulfil demand​

Applicable to manufacturing business (make rather than purchase)​

A completed Sales Budget is needed for the completion of a Production Budget​

Question 16

Labour Budget

Answer 16

A labour budget is prepared to determine the business’ needs for planned labour​

It may show:​

The number of labour hours required​

The number of works required​

The cost of hiring the required number of workers​

Question 17

Cash Budget

Answer 17

A cash budget details the expected cash/bank receipts and payments​
usually on a month by month basis​
Produced in order to show the estimated bank balance at the end of each month throughout the period​

From the cash budget, the managers of a business can decide what action to take:​
when a surplus of cash is shown to be available or as is more likely​
when a bank overdraft needs to be arranged. ​
​
A cash budget consists of three main sections:​

Receipts for the month​
Payments for the month​

Summary of bank account​

Question 18

Master budget

Answer 18

A cash budget does not indicate the profits or losses being made by a business.​
A master budget is the next logical step once all other budgets, including the cash budget, have been prepared.​

Forecast Income Statement​
Forecast Statement of Financial Position​

Question 19

Limitations of Budgetary Control​

Answer 19

They may not be completely accurate due to poor information and data​
Can demotivate staff who have not been involved in planning the budget​
Can be set too easily and too low so the business does not use its resources to best advantage​
The benefits of setting the budget must outweigh the costs (time and effort used)​