Budgeting Flashcards
What is a budget and what is it used for?
Detailed plan for the acquisition and use of resources over a time period.
Used for Income, Expense and Capital (monetary)
Used for Production, Labour and Material Usage (non-monetary)
What are the 6 purposes of a budget?
PLANNING of operations
CO-ORDINATE activities
COMMUNICATE to various managers
MOTIVATE managers to achieve targets
CONTROL activities
EVALUATE managers performance
What are the components of a typical budget?
Master budget includes
Budgeted P/L statement
Budgeted SFP
Cash budget
What are the three factors in organising a budget?
1 The Budget Committee - key executives who advise the budget director, though final approval rests with the directors.
2 Accounting staff - providing information, supporting and consolidating budget
3 The Budget Manual - prepared by accountant, and details roles and objectives of budget and the timetable.
What are the 8 stages to a budget?
1 Budget policy communicated 2 Principal budget factor determined 3 Sales budget prepared 4 Initial preparation of other budgets 5 Negotiation with higher management 6 Co-ordination and review of budgets 7 Budgets accepted 8 Ongoing review
What is the principal budget factor?
Factor that limits the activities of the organisation, usually sales demand for most companies.
What are the components of the master budget?
1 Sales budget
2 Production budget
Functional Budgets:
1 Materials budgets
2 Labour budget
3 Overhead budget
What makes the principal budget factor difficult to forecast?
Sales demand depends on external factors such as economic conditions, competitors and promotions.
Forecasts are based on:
Judgement
Statistics
Past information
Other factors could be production capacity, finance, availability of labour or materials. Attempts should be made to identify and remove the limiting factor.
What are the advantages of bottom-up (participative) budgeting?
More likely for managers to accept targets
Local knowledge
Involves managers in process and motivates them
What are the advantages of top-down (imposed) budgeting?
Doesn’t take up the time of lower management, allowing them to focus on day-to-day operations
More specialist knowledge to produce budget
Reduces budgetary slack
What is budgetary slack?
Padding the budget by setting lower targets intentionally by underestimating revenue or overestimating costs. Slack is the difference between a realistic target and the projection.
How challenging should budgets be?
Employees are motivated by targets, but if it goes beyond a certain level it has a negative effect on performance.
Challenging budgets with possible, but unlikely, goals are best.
What are the advantages of incremental budgets?
Quick and easy to do
Useful if historical figures are reliable and business is efficient
Makes allowances for growth, inflation, and cost savings
What are the disadvantages of incremental budgets?
Problems are carried forward year on year
Managers may ‘use up’ their budget at the end of the year so they don’t have it reduced afterwards
Encourages slack as padded budgets carried forward
What is zero based budgeting?
Establishing plans with an assumption of no activity and justifying each program.
Stages:
Identify and justify each activity, its need and cost.
Describe each activity in a decision package
Ranking these packages in order of priority
The allocation of resources according to the ranking.
What are the benefits of ZBB?
Reduce inefficient use of resources and budgetary slack.
Managers made aware of consequences and focuses on value for money.
Creates a questioning attitude
Attention to problematic activities
Avoids problems of incremental
Increased involvement of staff
What are the disadvantages of ZBB?
Time, cost and effort
Difficult to justify rankings
Managers need special skills
Can be a mechanical exercise if annual
More likely to be used as a one-off, or discretionary
What are fixed budgets?
Prepared for only one activity level. Difficult to compare with actual results when actual activity level is different from planned.
What are flexible budgets?
Prepared for different activity levels. All variable costs and revenues are flexed, fixed costs unchanged.
What is Activity Based Budgeting (ABB)?
ABB aims to authorise only the supply of those resources that are needed to perform activities required to meet budgeted production and sales volumes.
What is the ABB procedure?
Budgeted output of cost objects
Determine the necessary activities
Determine the resources required for the budget period
What are the 5 ABB stages?
1 Estimate production and sales volume by products and customers
2 Estimate the demand for organisational activities to support this level of production and sales
3 Determine resources required to perform activities
4 For each resource, estimate the quantity that must be supplied to meet the demand.
5 Take action to adjust the capacity of resources to match the projected supply
What are advantages of rolling budgets?
The budget always extends in to the future
Managers encouraged to constantly review plans
Actual performance will be compared with a more recent and realistic plan
What are disadvantages of rolling budgets?
Time, effort and expense involved
It introduces uncertainty for the managers as targets are being changed
Can a budget fulfil all its functions?
There are clashes such as motivation and planning (realistic vs unlikely targets) and planning with performance evaluation (budgetary slack)
What are criticisms of budgeting?
Encourage rigid planning and incremental thinking that is unable to react to changes.
Time consuming
Focus too much on short-term finances
Encourage gaming and opportunism
Bind companies to a fixed plan
Incentive to meet targets, not do better.
Wasteful spending encouraged to use up budget
Disconnected from strategy
Sales budgets pro-forma:
Sales Units x
Selling price x
—————
Sales revenue x
Production budgets pro-forma:
Sales x Closing Inventory x Opening Inventory (x) --------------- Production x
Direct Material pro-forma:
Production x Usage per unit x -------- Total material usage x Closing inventory x Opening Inventory (x) -------- Total Material purchases x Price per kg -------- Total material purchases x
Direct labour pro-forma:
Production x Hours per unit x ------- Total hours x Total hours (inc min) x Labour rate ------- Total direct labour cost x
Production Overhead pro-forma:
Production x Variable overhead per unit x ------- Total variable overhead x Fixed overhead x ------- Total production overhead x
Selling & Admin pro-forma:
Units sold x Variable o/h per unit x ------- Total variable o/h x Fixed overhead x ------- Total selling & admin x
Cash budget pro-forma:
Receipts Cash receipts (w1) x
Payments Labour x Production overhead x Selling & admin overhead x Cash dividends x Equipment x Materials purchased (w2) x
Net cash flow x
