Budgeting (6)

Question 1

Define budget theory

Answer 1

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.

Question 2

State the purposes of budgeting

Answer 2

• Planning for the future
• Controlling costs
• Co-ordination
• Communication
• Motivation
• Evaluation
• Authorisation
• Resource allocation

Question 3

State the preliminary steps in preparing a budget

Answer 3

• 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

Question 4

State the final stages of budget preparation

Answer 4

• Initial budgets are prepared
• Initial budgets are reviewed
• Master budget is prepared
• Comparisons between budgets and actual results

Question 5

Define a functional budget

Answer 5

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

Question 6

State the formula for budgeted production levels as used in a production budget

Answer 6

Budgeted production = forecast sales + closing inventory - opening inventory

Question 7

There are two types of material budget that you need to be able to calculate, define (1) the usage budget

Answer 7

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

Question 8

There are two types of material budget that you need to be able to calculate, define (2) material purchases budget

Answer 8

The material purchases budget is made up of:

Material usage budget + closing inventory - opening inventory

Question 9

State the formula for labour budgets

Answer 9

Labour budgets are simply the number of hours multiplied by the labour rate per hour

Question 10

Define the master budget

Answer 10

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

Question 11

There are two methods for analysing semi-variable costs into their fixed and variable elements. State (1) the high-low method

Answer 11

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

Question 12

There are two methods for analysing semi-variable costs into their fixed and variable elements. State (2) linear regression method

Answer 12

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

Question 13

An alternative to drawing a graph to calculate whether two variables are correlated is to calculate the correlation coefficient (r), define this

Answer 13

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.

Question 14

Define the coefficient of determination

Answer 14

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

Question 15

Define big data

Answer 15

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

Question 16

State the main characteristics of big data (4 V’s)

Answer 16

Volume, velocity, variety, veracity

Question 17

Define data analytics

Answer 17

Data analytics is the process of collecting, organising and analysing large sets of data to generate trends and other information to aid decision making

Question 18

Define data mining

Answer 18

Data mining is the process of sorting through data to identify patterns and relationships between different items, usually with the use of statistical algorithms.

Question 19

Define structured data

Answer 19

Structured data is data that is contained in a data record or file

Question 20

Define unstructured data

Answer 20

Unstructured data is data that is not easily contained within structured data fields, such as pictures, videos etc

Question 21

What is big data’s purpose in budgeting?

Answer 21

Many companies are now analysing big data in order to identify trends and other correlations in information, to improve forecasting and overall profitability

Question 22

State the pros and cons to big data

Answer 22

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

Question 23

Define top down budget

Answer 23

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

Question 24

Define a bottom up budget

Answer 24

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.

Question 25

State the advantages and disadvantages of participative budgeting

Answer 25

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

Question 26

Define continuous/rolling budget

Answer 26

A continuous/rolling budget is prepared a year ahead and is updated regularly by adding a further accounting period once the first has expired

Question 27

Define incremental budget

Answer 27

An incremental budget is a type of budget that uses the previous period’s budget as a starting point and then adds ‘increments’

Question 28

Define zero-based budget

Answer 28

A zero based budget is a type of budget that starts the budgeting process from zero because it does not take anything for granted