Budgeting

Question 1

What is a budget?

Answer 1

A budget is a quantitative statement for a defined period of time, may include planned revenues, expenses and cash flows.

Question 2

4 functions of budgeting

Answer 2

• Requires senior managers to plan
• Promotes co-ordination and communication
• Evaluates performance
• Motivaates staff towards completing company goals

Question 3

Stages of budgeting

Answer 3

Planning - managers consider their goals and objectives and how to achieve them
Control - evaluating performance, deviations possibly caused by poorly conceived budgets or changing market conditions

Question 4

Bottom-Up Budgets

Answer 4

All individuals in the company participate in setting the budget. Improves motivation and leads to individuals being held accountable for budgets

Question 5

Top-Down Budgets

Answer 5

Budgets imposed by management. Indivuals therefore have limited accountability. Can lead to less motivation.

Question 6

Limitations of budgets

Answer 6

• Based on expected performance for the coming year but there may be unseen circumstances that alter it
• Planning for the future may not motivate employees, especially if the target is deemed unachievable

Question 7

Why prepare cash budgets?

Answer 7

• Reveals periods where shortages of funds may appear
• These periods can be identified ahead of time
• Arranagemnts with banks can be pre-arranged to meet short-falls
• Can take steps to avoid shortages/ repay asap to avoid high finance costs
• Can be demanded by banks when loans needed
• Used to see if business can meet repayments

Question 8

What is an incremental budget?

Answer 8

Traditional method of budgeting, basing this years budget on last years budget and adding an increment. Simple method and widely used.

Question 9

incremental budget advantages

Answer 9

• Easy to prepare
• Based on last years numbers

Question 10

incremental budget disadvantages

Answer 10

• Encourages slack in budgets
• May only spend to reach budget
• Assumes constant market conditions

Question 11

What is Zero Based Budeting?

Answer 11

• Requires that all budget amounts be currently justified even if they were supported in prior budgets
• Preparing a budget for each cost centre from scratch
• Each year from scratch

Question 12

Advantages of zero based budgeting

Answer 12

• Efficient allocation of resources
• Responds to environmental changes
• Creates questioning attitude
• Focuses on outputs and value of money

Question 13

Disadvantages of zero based budgeting

Answer 13

• Time consuming
• More information is required
• Training
• High costs

Question 14

What is a rolling budget?

Answer 14

Budget which is continuously updated by adding a further period

Question 15

Advantages of a rolling budget

Answer 15

• Reduces uncertainty in unstable environment
• Planning and control on a more realistic plan
• Used to appraise performance
• Better motivational effect

Question 16

Disadvantages of a rolling budget

Answer 16

• Time
• Effort and money spent in preparation
• Uneccessary in a stable environment

Question 17

What is a flexible budget?

Answer 17

Shows revenue and expenses that should have occurred at the actual level of activity

Question 18

Advantages of a flexible budget

Answer 18

• May be prepared for any action level in a relevant range
• Reveal variances due to good cost control or lack of cost control
• Improve performance evaluation

Question 19

How to ‘flex a budget’

Answer 19

• Total variable cost change in direct proportion to changes in activity
• Totwl fixed costs remain unchanged within relevant range