Budgeting Flashcards
What is the primary purpose of budgets?
A budget is a financial plan for a business, serving several purposes
What is the planning & control cycle?
Set objectives, create a plan to achieve objectives, operate in line with objectives, control results
What are the three types of planning?
- Strategic planning
- Tactical planning
- Operational planning
What is strategic planning?
A long-term plan of action to achieve objectives, typically more than 1 year
What is tactical planning?
Medium-term plans that break down strategic plans into action plans for units, typically within 1 year
What is operational planning?
Short-term plans or day-to-day plans, typically daily, weekly, and monthly
What are the types of budgets?
- Incremental budgets
- Zero-based budgeting
- Rolling budgets
- Activity-based budgeting
- Beyond budgeting
What is incremental budgeting?
Involves using the most recent budget with some adjustments as the basis for the new budget
What are the advantages of incremental budgeting?
- Simple
- Cheap
- Suitable for stable environments
- Quick to prepare
What are the disadvantages of incremental budgeting?
- Encourages dysfunctional behavior
- Not suitable for dynamic environments
- Protects budgetary ‘slack’
- Leads to targets that are not challenging
What is zero-based budgeting (ZBB)?
Involves creating budgets from scratch, requiring each activity and cost to be rationalized
What are the steps in putting together a zero-based budget?
- Determine objectives
- Prepare decision packages
- Rank decision packages
- Allocate resources
What are the advantages of zero-based budgeting?
- Rationalization of costs
- May reduce inefficiencies
- Involves managers in the budgeting process
- Focuses on the future
What are the disadvantages of zero-based budgeting?
- Encourages short-term thinking
- Ranking process may be arbitrary
- Time-consuming
- Requires managers to have specific skills
What is a rolling budget?
A continually updating budget where a new budget period is added as soon as the earliest budget period finishes
What are the advantages of rolling budgets?
- Useful when environment is dynamic
- Creates more accurate budgets
- Forces managers to plan ahead
- Reduces uncertainty in budgets
What are the disadvantages of rolling budgets?
- Time-consuming
- Requires resources
- Difficult to communicate frequent changes
- Motivational impacts
What is activity-based budgeting?
Involves using information derived from activity-based costing (ABC) to produce budgets
What are the advantages of activity-based budgeting?
- Useful when overheads are high
- Helps to improve cost control
- Highlights the drivers of costs
- Highlights important critical activities
What are the disadvantages of activity-based budgeting?
- Requires ABC
- May require information systems
- Difficult to allocate responsibility to activities
- Requires significant time and effort to set up
What is beyond budgeting?
An approach that seeks to overcome issues associated with traditional budgeting, focusing on principles rather than rigid methodologies
What are the advantages of beyond budgeting?
- Targets are market-focused
- Encourages innovation
- Encourages faster decision making
- Improved motivation
What are the disadvantages of beyond budgeting?
- Potential resistance from staff
- Requires resources
- Increased budget complexity
- Requires cultural changes
What is the primary objective of preparing an operational budget?
To establish the overall activity plans and budgeted profit for the period.
How has technology impacted the budget preparation process?
It has reduced the time involved and improved the accuracy of budget working papers.
What is the key budget driver commonly used in budget preparation?
Sales demand.
List the component budget calculations prepared to complete the operational budget.
- Production volume budget
- Material usage and purchases budget
- Staffing levels and labour cost budget
- Production overhead budget
- Cost of goods sold budget
How is the sales revenue budget calculated?
By multiplying the budgeted sales volume by the budgeted selling price for each product or service.
Fill in the blank: The production volume budget will be based on expected _______.
[sales demand].
What adjustment is made to the production volume based on quality control?
An adjustment must be made to reflect expected rejection of completed units.
wastage
What is the formula to calculate the total production when accounting for rejected units?
Total production = Good production / (1 - Rejection rate).
True or False: The closing inventory becomes the opening inventory for the next quarter.
True.
What happens to the total budgeted sales revenue if the budgeted selling price of the standard range is reduced?
It shows a reduction in total budgeted sales revenue.
List the components included in the Master budget.
- Budgeted statement of profit or loss
- Budgeted statement of financial position
- Cash flow budget
Fill in the blank: The total production volume is used as the basis for the remaining _______.
[functional component budgets].
Fill in the blank: The production overhead budgets are likely to be estimated by the _______.
production manager
What is the formula to calculate the total material usage?
Material required for production + Material wastage
What is stress testing in the context of budgeting?
The process of evaluating the budget for potential adverse economic changes to plan for rapid responses.
How can a recession affect a restaurant’s budgeted revenue?
Increased unemployment and interest rates reduce customer income, leading to lower demand for bookings.
What are the potential consequences of a recession for a restaurant chain like BDN?
- Reduced demand for bookings
- Increased redundancy costs
- Higher interest costs on borrowings
What factors should be considered when conducting a stress test?
- Economic changes
- Customer spending behavior
- Interest rates
- Staffing needs
True or False: Stress testing is a simple and inexpensive process.
False
What happens to fixed production costs during a volume reduction for SBC Company?
They remain unchanged but can be reduced due to facility closure.
What must be considered in constructing an operational budget?
- Expected costs of materials
- Labour
- Overheads
- Production volume
What is a significant factor in determining the operational budget’s accuracy?
Changes in budget assumptions and their impact on component budget calculations.
What is internal control?
A process designed to help the organisation accomplish specific goals or objectives.
What are some actions individuals take to control risks in personal finance?
- Review bank statements for unusual items
- Check balance regularly
- Keep records of receipts and payments
- Review items when risk is higher
- Recalculate bank statement
- Rely on someone else to check
- Trust the bank or ignore
What are examples of internal control in an organization?
- Standardised procedures
- Reviews and checks for quality
- Performance measurement
- Strategic and operational plans
- Authorisation checks on transactions
- Security around key assets
- HR controls
What is the purpose of a control system?
To generate information about a part of the business, project, or process for future improvements.
What is feedback control?
A system where actual results are compared to budgeted results to correct future outcomes.
What are the two types of feedback in feedback control?
- Negative feedback: adverse deviation
- Positive feedback: favourable deviation
What is negative feedback?
Occurs when the deviation from the budget is adverse, indicating management needs to take corrective action.
What is positive feedback?
Occurs when the deviation from the budget is favourable, indicating management should take action to increase the favourable results.
What are feedforward control systems?
Systems that use forecasting to correct unfavourable results before they occur.
Why might management use feedforward control systems?
To take action to prevent adverse variances before they happen.
Fill in the blank: Internal control is designed to help the organisation accomplish specific _______.
[goals or objectives]
True or False: Internal controls only focus on preventing fraud.
False
What is a fixed budget?
A budget that remains unchanged throughout the course of the period.
What are favourable variances in a fixed budget?
Variances that indicate better-than-expected performance, such as lower costs for labour and materials.
What are adverse variances in a fixed budget?
Variances that indicate worse-than-expected performance, such as lower units produced or total profit.
What is a limitation of fixed budgets?
They do not account for variable costs that change with the level of activity.
What is a flexible budget?
A budget that shows expected revenues and expenditures for the actual number of units produced.
What is the first step in preparing a flexible budget?
Identify fixed and variable costs.
What remains unchanged in a flexible budget?
Budgeted fixed costs.
How is variable cost per unit calculated?
By dividing the total variable cost over the budgeted quantity of units produced/sold.
Fill in the blank: In a flexible budget, budgeted variable costs will ______ with the level of output.
[flex]
What does a flexible budget allow management to do?
Identify genuine variances and act upon them to improve efficiency.
What was the total profit variance shown in the flexible budget example?
£27,200 favourable profit variance.
What is the significance of comparing actual results to a flexed budget?
It provides a more meaningful comparison as both are based on the same volume of units.
True or False: A fixed budget can provide insight into whether a variance is due to volume or efficiency.
False.
What is the formula to calculate total variable material costs in the flexible budget?
Variable cost per unit × Actual units sold.
List three types of costs to be identified in Step 1 of preparing a flexible budget.
- Direct labour
- Production overheads
- Selling and admin costs
What is the impact of using a fixed budget on variance analysis?
It can lead to uncertainty in determining whether variances are due to volume or efficiency.
