budgets chapter 32

Question 1

budgeting

Answer 1

planning future activities by establishing performance targets, especially financial ones

Question 2

what happens when a business does not have a budget

Answer 2

be without a direction or purpose
be unable to allocate the scarce resources of the business effectively
have demotivated employees with no plans or targets to work towards
be unable to measure its progress by measuring the plans against actual performance

Question 3

process of budgeting

Answer 3

planning for the future must take into account the financial needs and likely consequences of these plans. the budgeting process: setting and agreeing financial targets for each section of a business. it is usually for each cost centre and profit centre to have budgets set for the next 12 months, broken down on a month by month basis

Question 4

the measurement of performance

Question 5

why should business managers know the performance of business

Answer 5

knowing how the different departments and divisions of a business are performing helps managers assess the strengths and weaknesses of the organisation

Question 6

what can be done after measuring performance

Answer 6

management action can be taken to build upon strengths and correct the weaknesses. assessing actual performance against pre set targets is the best way of measuring the performance, over time, each section of a business.

Question 7

what needs to be done to review the financial performance of a business

Answer 7

financial targets have to be set. These targets are called the budgets of the business and they should be established for all divisions and sections of a business.

Question 8

benefits of using budgets: Planning

Answer 8

The budgetary process makes managers consider future plans carefully so that realistic targets can be set. With a clear sales budget

Question 9

benefits of using budgets: allocating resources

Answer 9

Budgets can be an effective way of making sure that the business does not spend more resources than it has access to. Without a detailed and coordinated set of plans for allocating the business’s money and resources, who would decide ‘who gets what”?

Question 10

benefits of using budgets: setting targets

Answer 10

Most people work better if they have a realistic target to aim for. This motivation will be greater if the budget holder or profit centre manager has been delegated some accountability for setting and reaching budget levels.

Question 11

benefits of using budgets: coordination

Answer 11

Discussion about the allocation of resources to different departments and divisions requires coordination between these departments. Once budgets have been set, people will have to work effectively together if targets are to be achieved.

Question 12

benefits of using budgets: controlling and monitoring a business

Answer 12

Plans cannot be ignored once they have been set and agreed with the budget holder. Checks must be undertaken regularly to control and monitor the performance of the budget holder and their department. Many factors might have changed since the budget was set. Managers cannot assume that the budget target will be achieved without careful control and monitoring.

Question 13

benefits of using budgets: measuring and assessing performance

Answer 13

Once the budgeted period ends, variance analysis is used to compare actual performance with the original budgets. This is an important way of assessing managers’ performance. It would not be possible to assess how well individual departments had performed without a clear series of targets to compare actual performance with.

Question 14

budget

Answer 14

the individual responsible for the initial setting and achievement of a budget.

Question 15

variance analysis

Answer 15

calculation of the differences between budgets and actual figures, and analysis of the reasons for such differences.

Question 16

potential drawbacks of using budgets: lack of flexibility

Answer 16

If budgets are set with no flexibility built into them, then sudden and unexpected changes in the external environment can make them very unrealistic. Unrealistic budgets will demotivate the budget holder and other employees.

Question 17

potential drawbacks of using budgets: focus on short term

Answer 17

Budgets tend to be set for the relatively short term. Managers may take a short-term decision to stay within budget that may not be in the best long-term interests of the business.

Question 18

potential drawbacks of using budgets: unnecessary spending

Answer 18

If managers have underspent their budgets just before the end of the budgeting period, they might make decisions to spend unnecessarily so that the same level of budget can be justified next year.

Question 19

potential drawbacks of using budgets: training on budgets

Answer 19

Setting and keeping to budgets is not easy and all managers with delegated responsibility for budgets will need extensive training in this role.

Question 20

potential drawbacks of using budgets:: budgets for new projects

Answer 20

Setting budgets for big new projects is very difficult and often inaccurate. This is particularly true if similar projects - like a super-fast train line - have not been undertaken before.

Question 21

delegated budgets

Answer 21

budgets for which junior managers have been given some authority for setting and achieving

Question 22

features of effective budgeting

Answer 22

a forecast is a prediction of what could occur in the future given certain conditions
cost centres and profit centres with a measurable outcome will have budgets set
coordination between departments when establishing budgets avoid departments making conflicting plans
decisions regarding budgets should be made with managers who will be responsible for meetings and people responsible for fulfilling a budget. it motivate departments and leads to establishment of more realistic targets
budgets can be used to find successful and unsuccessful managers by reviewing the performance of each manager

Question 23

incremental budgeting

Answer 23

uses last year’s budget as a basis, and an adjustments is made for the coming year. cost budgets will be adjusted for forecasted inflation and expected changes in output. it d

Question 24

ways of budgeting: incremental budgeting

Answer 24

uses last year’s budget as a basis, and an adjustments is made for the coming year. cost budgets will be adjusted for forecasted inflation and expected changes in output. it

Question 25

features of incremental budgeting

Answer 25

cost budgets will be adjusted for forecasted inflation and expected changes in output. it does not allow for unforeseen events. by using the previous years budget, the entire budget for the coming year does not have to satisfied. there is no fundamental appraisal of each department’s targets or need for resources

Question 26

ways of budgeting: zero budgeting

Answer 26

sets budgets to zero each year and budget holders have to argue their case for target levels and to receive any finance.

Question 27

features of zero budgeting

Answer 27

it is time consuming as fundamental review of the work and importance of each budget holding section is needed each year . it does not provide added incentive for managers to defend the work of their own section. changing situations can be reflected in very different budget levels each year

Question 28

ways of budgeting: flexible budgeting

Answer 28

cost budgets for each expense are allowed to vary if sales or output vary from budgeted levels. budget can change whether there is a favorable variance or a adverse variance

Question 29

features of flexible budgeting

Answer 29

Flexible budgets are more motivating for budget-holding managers as they will not be criticized for adverse variances, which might occur just because output was lower than budgeted. The flexible targets are more realistic. flexible budgets make it easier to produce valid and accurate variance analyses as they indicate changes in efficiency, not changes in output.

Question 30

favorable variance

Answer 30

a change from the budget that leads to higher than planned profit

Question 31

adverse variance

Answer 31

a change from the budget that leads to lower than planned profit

Question 32

variance

Answer 32

difference between a budget and the actual figure achieved at the end of the budget period

Question 33

reasons to calculate variances

Answer 33

Variances measure differences from the planned performance of each department over a given period. Measuring performance is a key benefit of budgets.
Finding out the reasons for variances can help set more realistic budgets in the future.
Finding out the reasons for variances can help the business take better decisions.
The performance of each individual cost centre and profit centre may be appraised in an accurate and objective way.

Question 34

why should favorable variances be analysed

Answer 34

They may reflect a poor and inaccurate budgeting process where cost budgets were set too high. A favorable direct cost variance caused by output being much less than planned for is not a sign of success - why were sales and output lower than planned for?

Question 35

why should adverse variances be analysed

Answer 35

companies are able to use the information to identify a problem so that it can be fixed or simply to improve overall company performance

Question 36

possible causes of adverse variances

Answer 36

Revenue is below budget because either fewer units were sold or the selling price had to be lowered due to competition.
Actual raw material costs are higher than planned because either output was higher than budgeted or the cost per unit of materials increased.

Question 37

possible causes of favorable variances

Answer 37

Revenue is above budget due to higher-than-expected economic growth or a competitor closing down.
Raw material costs are lower because either output was below budget or the unit cost of materials was below budget.

Question 38

benefits of regular variance analysis

Answer 38

Identifying potential problems early so that remedial action can be taken.
Allowing managers to concentrate their time and efforts on the major problem areas. This is known as management by exception. In this case, it seems that managers should quickly investigate the likely causes of the lower-than-expected sales figures.