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BUSN1002 > Budgets > Flashcards

Budgets Flashcards

1
Q

What are budgets, what aren’t they and what do they do?

A
  • A financial plan for the short term, typically one year
  • Not a forecast
  • Converts long term plans into an actionable blueprint for the future
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2
Q

What are forecasts?

A
  • Predictions of the future state of the environment

- Useful to the planner/budget setter

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3
Q

What are the limiting factors concerning budgets?

A
  • Aspects of a business that stop it from achieving objectives
  • Limited ability to sell its products
  • Shortage of funds, labour, materials or plants
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4
Q

What do budgets achieve?

A
  • Promote forward thinking and the possible identification of short term problems
  • Help coordinate various sections of the business
  • Motivate managers to achieve better performance
  • Provide a basis for a system of control
  • Provide a system of authorisation for managers to spend up to a limit
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5
Q

What is the utility of the cash budget?

A
  • The cash budget is a key budget - all aspects of a business are eventually reflected in cash
  • Reflects the whole business more than any other single budget
  • All businesses large or small will almost certainly prepare a cash budget as a minimum
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6
Q

What are the steps to cash budget preparation?

A
  • Determine operating activities plans
  • Determine investment activities plans
  • Determine financing activities plans
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7
Q

What are the steps to determining operating activities plans in the budget setting process?

A
  • Start with the sales budget and opening cash balance
  • Determine expected levels of accounts receivable
  • Determine required inventory levels
  • Calculate purchases
  • Determine expected level of accounts payable
  • Determine expected level of other expenses
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8
Q

What are the steps to determining investing activities plans in the budget setting process?

A

Determine expected amount of capital purchases and sales e.g. PPE

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9
Q

What are the steps to determining financing activities plans in the budget setting process?

A

Determine borrowings, repayments in borrowings and movements in owners equity e.g. dividends paid & share capital issued

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10
Q

What is the format of a budget?

A
  • Reciepts
    • Accounts receivable etc.
    • Total receipts
  • Payments
    • Accounts payable
    • Salaries & wages
    • Overheads
    • Capital purchases
    • Total payments
  • Cash surplus
  • Opening balance
  • Cash balance
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11
Q

How is depreciation calculated for the cash budget?

A

Does not involve cash expense so is not included in cash budget

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12
Q

How are overheads in arrears calculated in the cash budget?

A

Successive months expenses added and paid in term

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13
Q

In the cash budget, what is the cash surplus?

A

Total cash received - total cash payment

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14
Q

In the cash budget, what is the cash balance?

A

Opening balance + Cash surplus

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15
Q

How is cash paid to suppliers calculated in the cash budget and what is it dependent on?

A
  • Purchases (cash to suppliers) = Ending inventory - opening inventory + COGS
  • Changes in inventory will appear in ending inventory for the month of the change first
  • Depends on credit terms
  • If say one month, then purchases form previous month would be purchases for current month
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16
Q

How should performance be compared to the budget?

A
  • Draw a comparison between actual costs incurred and budgeted costs for the actual level (volume) of production achieved
    • We need to compare actual costs incurred (for the actual volume of production) and those we would have incurred in a budget if we had planned to achieve the level of production actually achieved
17
Q

By what mechanism can actual performance and budgeted performance be compared?

A

Flexing the budget

18
Q

What is flexing the budget?

A
  • Revising the budget to reflect costs that would have been expected for the actual activity
  • The flexed budget makes a more accurate comparison between budget and actual performance
  • i.e. scale the original budget figures up or down based on actual output
19
Q

What are the steps to flexing a budget?

A
  • Identify which items are fixed and which are variable relative to the level of output
  • Revise variable costs to actual level of production
    • ( (Original budget cost/quantity of inputs) / (original budget output) ) x (actual output)
  • Fixed costs in flexed budget do not vary from original budget even if
    actual costs were different
  • Prepare the revised (flexed) budget, then compare with actual figures
20
Q

What are the kinds of variances?

A
  • Adverse variance

* Favourable variance

21
Q

What is an adverse variance?

A

A difference between planned and actual performance, where the difference will cause the actual profit to be lower than the budget one

22
Q

What is a favourable variance?

A

A difference between planned and actual performance, where the difference will cause the actual profit to be higher than the budget one

23
Q

Examples of variances?

A
  • Sales volume (quantity) variance
  • Sales price variance
  • Materials variance
    • Total direct materials variance
    • Direct materials usage variance
    • Direct materials price variance
  • Labour variances
    • Total direct labour variance
    • Direct labour efficiency variance
    • Direct labour rate variance
  • Fixed overhead spending (expenditure) variance
24
Q

What are the factors to consider when investigating variances?

A
  • Can be both time consuming and expensive
  • Needs to establish a policy on which variances to investigate and which to ignore
  • Significant adverse variances represent a potential very costly fault and should be investigated
  • Significant favourable variances represent things not going to plan and may mean targets are too low
  • Insignificant variances should be kept under review in case they are not the result of chance factors
25
Q

What is the budgetary reconciliation?

A

Budgeted profit + all favourable variances - all adverse variances = actual profit

26
Q

What are the limitations of budgetary control?

A
  • Budgets are time consuming and costly to put together
  • Not all expenses can be directly linked to productive activity
    • Training expenses
    • Advertising expenses
  • Standards can rapidly become obsolete due to technological and price change factors
  • Delineating management responsibility may prove difficult in practice
  • Budgets can constrain responsiveness and flexibility
  • Some factors can be outside of management control e.g. economic
27
Q

What are the behavioural aspects of budgetary control?

A
  • Reseach indicates that
    • Existence of budgets tends to improve performance
    • Demanding but achievable targets seem to motivate more than easy targets
    • Unrealistic targets adversely affect performance
    • Allowing managers to set their own targets improves motivation, commitment and performance

BUSN1002 (7 decks)

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