Budgets, Planning And Control

Question 1

What is a BUDGET?

Answer 1

A financial plan for implementing management decisions

Question 2

What is the OBJECTIVES of budgeting?

Answer 2

Facilitate the achievement of objectives.
It compels planning.
It promotes the co-ordination of activities.
It promotes communication.
It provides a framework for control accounting.
It serves as a framework for authorization of decisions.
It provides a basis for performance evaluation.
It provides motivation for employees to improve performance.

Question 3

What is a principal budgeting factor?

Answer 3

The factor that restricts output

Question 4

What is the steps in the budgeting process?

Answer 4

1. Identify the principal budgeting factor
2. Prepare the sales budget
3. Prepare the production budget

Question 5

What is the characteristics of a budget?

Answer 5

It is future-orientated
It aims to achieve a predetermined goal
It is expressed in quantifiable terms

Question 6

How long are STRATEGIC budgets?

Answer 6

Usually for a long period: between 3 to 15 years

Question 7

How long are TACTICAL budgets?

Answer 7

Between 1 and 3 years, or as many as 5

Question 8

How long are OPERATIONAL budgets?

Answer 8

A single financial period (usually a year or less)

Question 9

What are types of budgets?

Answer 9

Cash budget

Question 10

What do the budget committee issue?

Answer 10

The budget manual or guidelines

Question 11

What is the budget manual?

Answer 11

A collection of instructions setting out general guidelines, procedures to be followed, deadlines and responsibilities

Question 12

What are the most likely principal budgeting factors?

Answer 12

Sales demand
Availability of raw materials
Machine capacity
Availability of cash and sources of funding

Question 13

What are the most likely principal budgeting factors?

Answer 13

Sales demand
Availability of raw materials
Machine capacity
Availability of cash and sources of funding

Question 14

What are raw material purchases influenced by?

Answer 14

By the production requirements and the opening and closing inventory of raw materials

Question 15

What is production influenced by?

Answer 15

Expected sales and the opening and closing finished goods inventory levels

Question 16

What aspects have to be kept in mind when drawing up a CASH budget?

Answer 16

1. Only cash flow items are reflected (not depreciation)

2. The period in which the cash flow is recorded is the period in which the cash flow takes place.

Question 17

Why is a cash budget important?

Answer 17

It shows the cash effect of all plans made within the budgetary process

Question 18

If the cash budget indicates a SHORT-TERM DEFICIT, what can be done?

Answer 18

Arrange with suppliers to pay them later.
Encourage debtors to pay sooner by offering early settlement discounts.
Arrange a bank overdraft.
Postpone capital expenditure.
Postpone dividend payments (if not yet declared).
Reduce inventory levels.

Question 19

If the cash budget indicates a LONG-TERM DEFICIT, what can be done?

Answer 19

Raise long-term finance (bank loan).
Sell unused assets (land).
Issue equity.

Question 20

If the cash budget indicates a SHORT-TERM SURPLUS, what can be done?

Answer 20

Pay creditors early.
Grant credit to customers.
Invest in interest-bearing short-term securities.

Question 21

What is additional benefits by taking actions on a short-term surplus?

Answer 21

Can receive early settlement discount.
Increase sales.
Receive interest income.

Question 22

If the cash budget indicates a LONG-TERM SURPLUS, what can be done?

Answer 22

Invest in capital equipment.
Expand business operations.
Diversify into other business areas.

Question 23

What is additional benefits by taking actions on a long-term surplus?

Answer 23

Increase production capacity.
Increase earning potential.
Increase earning potential, decrease risk.

Question 24

What is a MASTER budget?

Answer 24

When the functional and cash budgets have been prepared, they are summarized and a budgeted SFP, SCI and SCF are prepared.
It provides the overall picture of the planned performance for the budget period.

Question 25

What is a KPI?

Answer 25

Key performance indicator: A metric to quantify the performance an organization aims to achieve

Question 26

What areas do typical KPI’s relate to?

Answer 26

Profitability, management effectiveness, liquidity, solvency, investor ratios

Question 27

What is incremental budgeting?

Answer 27

The traditional approach to budgeting where the previous period are used as a basis for the budget

Question 28

What is ZBB?

Answer 28

Zero-base budgeting: it rejects the principal of incremental budgeting and advocates it should be prepared from ‘scratch’ or zero.

Question 29

What questions should be asked for preparing a ZBB?

Answer 29

Should this expense and activity be performed at all?
How much should the activity cost?
What is the level of activity required?

Question 30

What 3 stages do ZBB involve?

Answer 30

Decision package (each stand alone activity) should be identified and described.
Evaluate and rank decision packages in order of importance.
Resources are allocated accordingly.

Question 31

Advantages of ZBB over incremental

Answer 31

ZBB challenges the current way of doing things - Incremental preserves the status quo by adding inflation and adjusting for volume.
ZBB identifies and removes unnecessary activities and expenditure - incremental does not questions activities undertaken.
ZBB compels employees to question wasteful expenditure - incremental may lead to inflation-based increase for such expenditure.
ZBB leads to greater staff involvement, which may lead to greater job satisfaction and motivated staff.
Starting from zero base forces staff to stay up to date with the latest developments - Incremental less likely to force managers to study the environment.
ZBB can be very advantageous to service departments where output is sometimes difficult to quantify - incremental depends on output

Question 32

Disadvantages of ZBB compared to incremental

Answer 32

Incremental is less likely than ZBB to result in radical changes to operations, which makes for more stable organizational environment.
ZBB can be very time consuming - incremental is simpler with less effort.
ZBB is more complicated and could require management skills which organization may not possess.
Info systems may be inadequate to provide the info required to identify decision packages and to rank them for ZBB making incremental more viable

Question 33

What is a rolling budget?

Answer 33

Known as a continuous budget and prepared on a regular basis for the next year or short-term.

Question 34

What is the main disadvantage of rolling budgets?

Answer 34

The time required to prepare them properly

Question 35

What is probability theory?

Answer 35

The concept to use expected values where there is a great degree of uncertainty about future events.

Question 36

What is projection?

Answer 36

An expected future trend pattern obtained by extrapolation based on the notion that past events can serve as an indication of what will happen in future.

Question 37

What are 3 other methods for preparing projections based on historical data?

Answer 37

Linear regression
Scatter diagrams
Correlation

Question 38

How to project sales?

Answer 38

Obtain info on future sales from sales personnel.
Conduct market research.
Apply mathematical methods.

Question 39

What is a flexed budget?

Answer 39

Change according to change in activity levels

Question 40

What is a fixed budget?

Answer 40

Drawn up for a specific activity level

Question 41

Why may managers be negative towards the budget setting process?

Answer 41

Some may lack necessary numerical skills and tech knowledge to prepare a budget properly.
It may be a very busy period and find it hard to find time for a budget.
May not be aware of the importance of a budget, failing to understand the bigger picture.
May have the perception that it will be used as a punitive device if they fail to meet targets.
May perceive the budget process as a bureaucratic exercise and attempt to get it out of the way as effortlessly as possible.

Question 42

What performance-related problems may be encountered if the budget has been set?

Answer 42

Managers may have an attitude of doing just enough without trying to beat the targets.
Sometimes seen as an amount that has to be spent in governmental organizations.
Managers may find it difficult to interpret control reports because of lack of financial training.
In cases where control reports are not prepared timeously, such info loses its value and managers may be more likely to ignore it.
Managers may resist the budgetary control process if they feel that they have not had control over either the budget-setting or variances.

Question 43

What is an autocratic style in setting budgets?

Answer 43

Budget is imposed from the top down on the line managers (in other words: imposed by senior management)

Question 44

What is a democratic style in setting budgets?

Answer 44

Managers are encourage to participate in the budget-setting process

Question 45

Advantages of imposed budgets over participative budgets

Answer 45

Imposed are easy for senior management to ensure budget is in line with long-term business strategy.
Easier to ensure co-ordination between different business units for imposed.
Senior managers may be in a position to make better decisions owing to their experience for imposed.
Imposed can be set in a shorter period of time and mean the budget may be more accurate because it is based on more recent info.
Line managers do not have the opportunity to build in any budgetary ‘slack’ (cannot set budgets that are easy to attain).

Question 46

Disadvantages of imposed budgets over participative budgets

Answer 46

When imposed, line managers can be dissatisfied and feel their position does not receive necessary recognition.
Line managers often have better understanding and more experience of the operations of their division because of active involvement.
The budgeting process can be seen as an opportunity to gain ideas from line managers about ways of improving the operation of their units.
Because senior management is not always in touch with detail of circumstances faced by a specific unit, they may impose unachievable budgets.

Question 47

What is negotiated style of budgeting?

Answer 47

Budgets are as a result of a process of negotiation between line managers and senior management.

Question 48

What is a major drawback of negotiated style of budgeting?

Answer 48

They take a considerable time to prepare.

Question 49

What is an advantage of the negotiated style of budgeting?

Answer 49

The resulting budgets will probably be very realistic and are therefore likely to be accepted by all parties

Question 50

Feedback on how the units are performing needs to adhere to what pinciples?

Answer 50

Info should be communicated to line mangers who is in a position to take corrective action.
Reports should highlight significant variances.
Reports should be clear and understandable.
Reports should be as accurate as possible.
Reports should be timely,

Question 51

What is the role of the management accountant in the budget process?

Answer 51

Needs to have regular contact with line managers.
Should make time to discuss control reports with line managers.
Meaning and implication of info in the reports should be explained to line managers, keeping accounting jargon to the minimum.
Report should be clear and understandable.
Need to ensure info in report is both accurate and timely.

Question 52

What is Beyond Budgeting’s Criticism on traditional budgeting?

Answer 52

Time consuming & expensive.
Provide poor value to users.
Fail to focus on shareholde value.
Can be too rigid and prevent fast response.
Protect rather than reduce costs.
Stifle product and strategy innovation.
Focus on sales targets rather than customer satisfaction.
Are divorced from strategy.
Reinforce dependency culture.
Lead to unethical behaviour.