Budgeting

Question 1

What is budgeting?

Answer 1

A budget is a quantitative expression of a plan of action prepared in advance of the period it relates to. They st out the costs and revenues that ae expected to be incurred or earned in future periods.

Question 2

What are the purposes of budgets?

Answer 2

1) Planning
2) Control- when actual results are compared against the budget and action is taken.
3) Coordination- Coordinating parts of the business towards a common goal.
4) Delegation- extra responsibility to managers who may be involved in coordinating the budget making it more realistic.
5) Communication- formal communication channel between junior and senior managers.’
6) Authorisation- authorises certain expenditures for managers.
7) Evaluation- used to evaluate the actions of a manager within the business in terms of cost and revenues.

Question 3

What is the principal budget factor?

Answer 3

This is the limiting factor that caps the budget. In business terms, this is typically sales.

Question 4

What are the steps in preparing a budget?

Answer 4

1) Sales forecast budget
2) Production budget
3) Materials usage which leads to material purchases.
4) Overhead budget
5) Labour utilisation budget which leads to labour cost budget.

Question 5

What is a cash budget?

Answer 5

This is a detailed forecast of when an organisation expects to receive and pay out cash. It ensures that there is sufficient cash available to meet the level of operations planned.

Question 6

Cash budget considerations

Answer 6

1) Other expenses
2) Capital expenditure
3) Drawings

Question 7

What to ignore in cash budgets?

Answer 7

1) Accruals
2) Prepayments
3) Depreciation

Question 8

What should organisations do when they have a cash shortfall?

Answer 8

1) Apply for a bank loan or overdraft
2) Seek credit from suppliers
3) Cut back on staff
4) Reduce withdrawals
5) Allow customers less or no credit

It all depends on whether it is short-term or long-term.

Question 9

What are settlement discounts?

Answer 9

An incentive for early payment e.g. if they pay earlier they pay less.

Question 10

What to do when there is a cash surplus?

Answer 10

1) Deposit the money in the bank
2) Invest the money
3) Lend the money while charging interest

Question 11

Issues with offering credit

Answer 11

Some credit customers will never pay back their debts. This is called bad debt.

Question 12

What is responsibility accounting?

Answer 12

This is when unit managers are evaluated on items they have control over.

Question 13

What is a responsibility centre?

Answer 13

A segment of an organization where an individual manager is held responsible for the segment’s performance.

Question 14

What are the three types of cost centres?

Answer 14

1) Cost centre
2) Investment centre
3) Profit centre

Question 15

What are some controllable and non-controllable measures of performance?

Answer 15

Controllable- negotiation of price for raw materials.
Non-negotiable- factory rent

Question 16

What are the approaches to budgeting?

Answer 16

1) Fixed Budget
2) Incremental budget
3) Zero-based budgets

Question 17

What is a fixed budget?

Answer 17

These do not change.

Question 18

What is the incremental budget?

Answer 18

It starts with the previous year’s budget/ actual results and adds/subtracts an incremental amount to cover inflation and other known changes.

It is suitable for businesses that are stable where costs are not expected to change significantly.

Question 19

Advantages of incremental budgets

Answer 19

1) Quickest and easier method
2) Suitable for stable businesses.

Question 20

Disadvantages of incremental budgets

Answer 20

1) Builds on previous inefficiencies.
2) Uneconomic activities may be continued e.g. not outsourcing
3) Managers may spend unnecessarily to get the same budget next year.

Question 21

What is zero-based budgeting?

Answer 21

Each cost element must be specifically justified as though those activities were taken for the first time.

Question 22

Advantages of zero-based budgeting

Answer 22

1) Suitable for public sector organisations as they are rigorous.
2) Inefficiencies are dealt with.
3) Increased staff involvement meaning its more accurate.
4) Responds to changes in the business environment.
5) Knowledge and understanding of the cost behaviour patterns of the business will be enhanced.
6) Resources are allocated efficiently and economically.

Question 23

What are the four stages of ZBB?

Answer 23

1) Managers specify which responsibility centres they are in charge of.
2) Each individual activity is then described as a decision package. This should state the costs and revenue expected from the given activity.
3) Each decision package is evaluated and ranked usually using cost/benefit analysis against other activities.
4) The resources are then allocated to the various packages.

Question 24

Disadvantages of ZBB

Answer 24

1) Demotivation due to the long time spent on the budgeting process.
2) Ranking can be difficult for different types of activities where benefits are qualitative in nature.
3) Emphasises short-term benefits to the detriment of long-term goals.

Question 25

What is a top-down budget?

Answer 25

This is set without allowing the ultimate budget holder to have the opportunity to participate in the process.

Question 26

What is a bottom-up/ participative budget?

Answer 26

Budget holders participate in setting their own budgets.

Question 27

Advantages of bottom-down

Answer 27

1) More insightful therefore more realistic.
2) More motivation to meet own budgets.

Question 28

Disadvantages of bottom-up

Answer 28

1) Setting easier targets.
2) Difficult to reach an agreement with many people.

Question 29

Advantages of top-down

Answer 29

1) Easy and quick to implement.
2) Pushes for growth
3) Sees the bigger picture.

Question 30

Disadvantages of top-down

Answer 30

1) Lack of insight
2) De-motivates budget holders if too hard.

Question 31

What does the strategic planning process involve?

Answer 31

A vision statement that clarifies beliefs and governing principles and a mission statement which is more action-oriented.

Question 32

What is a long-term plan?

Answer 32

It is a statement of targets and activities required.

Question 33

What is the process for strategic planning, budgeting and control process?

Answer 33

1) Strategic planning process (specification of objectives and strategies.
2) Creation of a long-term plan to implement strategies.
3) Preparation of the annual budget within the context of the long-term plan.
4) Monitor actual results.
5) Respond to deviations from the plan.