Budgeting (6) Flashcards
Define budget theory
A budget is a quantitative expression of a plan of action prepared in advance of the period to which it relates.
Budgets give an idea of the costs and revenues as a whole.
State the purposes of budgeting
- Planning for the future
- Controlling costs
- Co-ordination
- Communication
- Motivation
- Evaluation
- Authorisation
- Resource allocation
State the preliminary steps in preparing a budget
- Long term objectives are defined
- Budget committee is formed (CE, Budget officer, functional departmental head)
- Budget manual is produced, setting out instructions relating to use of budgets
- Limiting or principal factor is identified, a factor that limits activity of the business, e.g. sales limit
State the final stages of budget preparation
- Initial budgets are prepared
- Initial budgets are reviewed
- Master budget is prepared
- Comparisons between budgets and actual results
Define a functional budget
A functional budget is a budget of income and/or expenditure which applies to a particular function. The main functional budgets you need to be able to prepare are:
Sales budget, production budget, raw material usage budget, raw material purchases budget, labour budget
State the formula for budgeted production levels as used in a production budget
Budgeted production = forecast sales + closing inventory - opening inventory
There are two types of material budget that you need to be able to calculate, define (1) the usage budget
The material usage budget is simply the budgeted production for each product multiplied by the number of kgs required to produce one unit of the product
There are two types of material budget that you need to be able to calculate, define (2) material purchases budget
The material purchases budget is made up of:
Material usage budget + closing inventory - opening inventory
State the formula for labour budgets
Labour budgets are simply the number of hours multiplied by the labour rate per hour
Define the master budget
The master budget is the budget into which all subsidiary budgets are consolidated. The master budget normally comprises: - budgeted profit or loss account - budgeted balance sheet - budgeted cash flow statement
There are two methods for analysing semi-variable costs into their fixed and variable elements. State (1) the high-low method
High-low method
(1) Select the highest and lowest activity levels and their associated costs
(2) Find the variable cost per unit:
VCPU = (cost at high activity - cost at low activity)/(High level of activity - low level of activity)
(3) Find the fixed cost by substituting the VCPU into the high or low activity level
Fixed cost = total cost at activity level - total variable cost
Disadvantage of this method is that it only takes into account two data points, not wholly representative
There are two methods for analysing semi-variable costs into their fixed and variable elements. State (2) linear regression method
A scattergraph can be used to make an estimate of fixed and variable costs by drawing a ‘line of best fit’. This line is represented by y=mx + c, where m =variable cost per unit and c = fixed costs
An alternative to drawing a graph to calculate whether two variables are correlated is to calculate the correlation coefficient (r), define this
The correlation coefficient measures the strength of a linear relationship between two variables. +1 being perfect positive, 0 being no correlation and -1 being perfect negative.
Define the coefficient of determination
The coefficient of determination is the square of the correlation coefficient, and so is denoted by r^2.
The coefficient of determination is a measure of how much of the variation in the dependent variable is ‘explained’ by the variation of the independent variable
Define big data
Big data is usually data that is obtained in addition to the traditional management data, e.g. key words discussed in published social media conversations
State the main characteristics of big data (4 V’s)
Volume, velocity, variety, veracity
Define data analytics
Data analytics is the process of collecting, organising and analysing large sets of data to generate trends and other information to aid decision making
Define data mining
Data mining is the process of sorting through data to identify patterns and relationships between different items, usually with the use of statistical algorithms.
Define structured data
Structured data is data that is contained in a data record or file
Define unstructured data
Unstructured data is data that is not easily contained within structured data fields, such as pictures, videos etc
What is big data’s purpose in budgeting?
Many companies are now analysing big data in order to identify trends and other correlations in information, to improve forecasting and overall profitability
State the pros and cons to big data
Advantages:
- Allows a substantial amount of information to be processed
- Allows an accurate demand model to be generated
- Provides companies the ability to understand customers’ preferences
- Big data can be used for short and long term decisions
Disadvantages:
- company needs to be seen as trustworthy
- Lack of forecasting tools available
- Infringement on privacy
- Security required to hold information
- Incorrect data
Define top down budget
A top down budget is a budget that is set without allowing the ultimate budget holder to have the opportunity to participate in the budgeting process. also called ‘imposed’ budget, or non-participative
Define a bottom up budget
A bottom up budget is a system of budgeting in which budget holders have the opportunity to participate in setting their own budgets. Known as participative budgeting.
State the advantages and disadvantages of participative budgeting
Advantages:
- increased motivation
- should contain better information
- increases managers’ understanding
- better communication
Disadvantages:
- senior managers may resent lack of control
- bad decisions from inexperienced managers
- budgets may not be in line with corporate objectives
- budget preparation is slower and disputes can arise
Define continuous/rolling budget
A continuous/rolling budget is prepared a year ahead and is updated regularly by adding a further accounting period once the first has expired
Define incremental budget
An incremental budget is a type of budget that uses the previous period’s budget as a starting point and then adds ‘increments’
Define zero-based budget
A zero based budget is a type of budget that starts the budgeting process from zero because it does not take anything for granted
