BUDGETS Flashcards
explain the principle budget factor.
Principal budget factor - often referred to as the limiting budget factor or the key budget factor.
This is the factor that limits output and therefore prevents continuous expansion. Usually the principle budget factor is sales demand. The principal budget factor could be some other limiting factor such as availability of materials.
Note on the factors taken into account by Spencer Ltd. in arriving at the expected sales in 2006 of 11,700 units
- market research
- trends
- last years sales
- opinion of sales manager and sales representatives
- price to be charged
- state of economy
- competition
- luxury vs necessities
what is an adverse variance? State why adverse variances may arise in direct material costs
An adverse variance is where actual costs exceed budgeted costs.
An adverse variance in direct material costs may arise if the purchase price of materials is higher than expected or if the quantities of material used are higher than expected.
explain, with examples, controllable and uncontrollable costs
Controllable costs - Costs that can be controlled by the manager of a cost centre. They will make the decision about the amount of the cost or if the cost should be incurred and can be held responsible for variances in these costs. E.g all variable costs are controllable.
Uncontrollable costs - Costs over which the manager of a cost centre has no control and therefore cannot be held responsible for variances in these costs. E.g rates to the local authority are uncontrollable
define cash budget and describe two of its advantages
A cash budget is a forecast or plan of cash inflow and cash outflow over a period.
Advantages:
1. highlights whether enough cash will be available to meet future needs.
2. helps to give advance knowledge so that overdraft can be arranged if shortfall occurs.
3. helps to predict future surpluses so that short-term investment can be made.
what is meant by capital budget?
This budget deals with any planned capital expenditure. e.g. purchase of fixed asset and planned capital receipts such as the sale of a fixed asset.
Decisions relating to these items would be the responsibility of the board of directors. The carrying out of the capital budget is the responsibility of the financial controller.
state items that could be considered on the principal budget factor
- sales demand
- supply of materials
- availability of labour
- capacity of the plant
- availability of capital
explain the term master budget. List the components of a master budget for a manufacturing firm
A master budget is a summary of all other budgets and provides an overview of the operations of the planned period.
A master budget for a manufacturing firm consists of :
1. budgeted manufacturing account
2. budgeted trading account and profit and loss account.
3. budgeted balance sheet
what options does a business have when it has (a) a cash surplus and (b) a cash deficit?
Cash surplus: This money can be placed in short-term investment opportunities in order to gain the most interest. When a company predicts that it will have a cash surplus this allows it to arrange for short-term investment or surplus funds to gain maximum interest. The surplus could be used to pay off any loans or purchase fixed assets.
Cash Deficit: The business needs to arrange alternative sources of finance e.g a bank overdraft to get them over the period of the deficit. Wen the company predicts that it will experience cash deficits this enables management to arrange for alternative sources of finance e.g. longer periods of credit or bank overdraft accommodation to cover such deficits.
on the basis of the cash budget you have prepared, what advice would you give the management of Retro ltd?
There are serious cash shortages in X and Y.
Retro ltd. should change the credit terms for debtors to encourage more prompt payment for example X% discount for cash payment in month of sale.
Hire equipment instead of buying it to reduce cash expenditure or delay the start date for repayment of loan / repay loan over longer period of time.
Agree better credit terms with creditors.
Examine variable overheads to see if they can be reduced.
Examine wage bill to see if it can be reduced.
why is it important a business prepares regular budgets
Budgeting is part of the planning process. It is a financial roadmap for a business.
Budgeting helps define areas of responsibility for staff and motivates staff to achieve targets, improve communication and builds teamwork.
The resources of the organisation are used as efficiently as possible and it can adapt quickly to changing circumstances.
Budgeting figures can be compared with actual performance. Adverse variances can be investigated and action taken to ensure it does not happen again
distinguish between the terms contribution and profit.
Contribution is sales revenue less variable costs. This goes towards paying off the fixed costs. Once the fixed costs are paid off, any further contribution goes towards profit.
Profit is sales revenue less total costs (fixed and variable)..
outline why conlon ltd. would prepare a flexible budget
To show management the cost levels at different levels of production.
To compare actual costs and budgeted costs at the same level of activity.
To compare budgeted costs and actual costs in order to identify variances. This allows corrective action to be taken.
To help in controlling costs or planning production levels. It is misleading to compare the budgeted costs at one level of activity with the actual costs of a different level of activity.
what is a favorable variance
Favorable variance occurs when actual costs are less than budgeted costs.
