Budgets & Flexible Budgeting

Question 1

Which budget will an organization prepare first? Why is it important to prepare this budget first?

Answer 1

Firms will begin with a Sales budget. After estimating future sales, firms will then be able to prepare a production budget or inventory purchases budget etc.

Question 2

How does budgeting help a manager plan for the future?

Answer 2

Budgeting forces a manager to write down their plans and expectations for the future. It helps quantify the future goals of the business, and ensure things like production, materials purchases, labour and administrative tasks are all thought about and planned for.

Question 3

List 3 benefits an organization can obtain from budgeting.

Answer 3

1. Improved motivation for staff to reach targets.
2. Improved coordination between different departments and functions of the business.
3. Improved long term planning.

Question 4

List 3 problems that can arise from the budgeting process.

Answer 4

1. incentive to create budgetary slack.
2. Managers could engage in earnings management to reach budgeted targets.
3. Managers may make short-term focussed decisions to reach budgetary goals, compromising long term goals

Question 5

When preparing a sales budget, list 3 factors you would need to consider that may help you improve your forecasting of future sales.

Answer 5

1. Last years sales,
2. any changes in the business environment, e.g. new stores, new products, new locations, any changes in the competitors behaviour,
3. any changes in the economic environment.

Question 6

What is a static budget?

Answer 6

A static budget is prepared at the start of an accounting period. It provides a quantitative estimation of the future. It provides an estimation of sales volume, price, and expected business costs.

Question 7

What is a flexible budget? (3 things)

Answer 7

1. Prepared at the end of an accounting period.
2. It uses the actual production or sales volume from the prior period,
3. Uses the standard costs, or the budgeted costs from the prior static budget to calculate what the expected budget would have looked like if production volume was known in advance.

Question 8

Managers are required to plan for the future, run daily operations, and control their business. Which budgets are most helpful for the planning, operating and controlling functions of a manager?

Answer 8

Static budgets are useful for planning the future, and are also useful to refer to when making daily operating decisions.

Flexible budgets are useful when controlling the organization, and evaluating whether the organization was meeting their objectives.