Budgeting

Question 1

Fixed budget

Answer 1

A fixed budget is a budget prepared for only one level of activity. It is based on the level of output planned at the start of the budget and does not change.

Question 2

Flexed budget

Answer 2

A flexed budget is developed using budgeted revenues and cost amounts based on the level of output actually achieved in the budget period.

Question 3

Cost function

Answer 3

Y = A + Bx
Y = total cost
A = fixed cost
B = variable rate
X = number of units

Question 4

Budgetary control report

Answer 4

Budget centre/holder = the name of the department where all queries and concerns go to them
Budgeted/actual activity level = budget activity must be flexed to actual activity
Date prepared / accounting period = must be close in time or else people will not remember information
Report relationship = up down
Budget item = materials, overheads, labour
Year to year = flex budget each year
Trend of variance = percentage change
Significance
Comments = what needs spoke upon

Question 5

Incremental (traditional) budgeting

Answer 5

Incremental budgeting is based on slight changes from the proceeding periods budgeted results or actual results. This is a common approach in a business where management don’t intend to spend a great deal of time formulating budgets, or where it does not perceive any great need to conduct a thorough re valuation of the business. This typically occurs in industry’s with little completion, so that profits tend to continue from year to year. (Static operational facilities.)

Question 6

Incremental (traditional) budgeting

Answer 6

It is presumed that most budget centres will start of their accounting year with the same employees and therefore budgets are based on existing performance/achievement levels with changes on happening due to
External factors eg Increase in raw material prices
Internal factors eg increase in wages

Question 7

Incremental (traditional) budgeting advantages

Answer 7

Simplicity - this is due to budgets being based on recent financial results or recent budgets that can be readily verified. They are easy, quick and cheap methods of budgeting .
Funding stability = if a programme requires funding for multiple years to achieve a certain outcome, this budgets is structured to ensure funds are flowing through the programme.
Operational stability = departments are operated in a consistent and stable manner for long periods of time.

Question 8

Incremental (traditional) budgeting disadvantages

Answer 8

Incremental in nature = assumes only minor changes are needed where Infant there may be major structural changes in the business or its environment that call for much more significant changes.
Fosters overspending = fosters a “use it or loose it” attitude In regards to expenditure.
Budget review = when budget is brought forward with minor changes there tends to be little incentive to conduct a thorough review, so the budgetary slack and inefficiencies are rolled forward.
Variance from actual = budgets based on prior budget causing a disconnect between the budget and actual results.