Cash Budget Theory

Question 1

What is a cash budget?

Answer 1

A cash budget is a plan that summarises the expected inflows and outflows of cash over a period of time. It is prepared by the financial or management accountant.

Question 2

Why is a cash budget prepared?

Answer 2

1. In order to anticipate cash flow and periods of cash surpluses and deficits
2. To ensure there is enough cash to meet the day to day needs of an organisation

Question 3

What is adverse variance and why may it arise in direct material costs?

Answer 3

Adverse variance: when the actual costs incurred are higher than the budgeted figures, the difference is called adverse variance. It may arise in direct material costs for a number of reasons. For example, if the raw material costs were higher than expected.

Question 4

What is favourable variance and why would it arise in direct material costs?

Answer 4

Favourable variance: when the actual costs are less than the budgeted figures, the difference is called favourable variance. It arises in direct material costs for a number of reasons such as the raw material costs are less than expected, the quantity used of raw materials is less than expected or there is an increase in sales