Chapter 10: Budgetary Planning

Question 1

What is a budget?

Answer 1

A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms.

Question 2

What are two primary purposes of a budget?

Answer 2

The primary purposes of a budget are to serve as
1) a basis for performance evaluation and 2) a means to promote efficiency and discourage waste.

Question 3

List three benefits of budgeting.

Answer 3

Three benefits of budgeting are:
1) It requires management to plan ahead. 2) It provides definite objectives for evaluating performance.
3) It creates an early warning system for potential problems.

Question 4

What are the essentials of effective budgeting?

Answer 4

Effective budgeting relies on

a sound organizational structure,

realistic and achievable goals based on research and analysis,

and acceptance by all levels of management.

Question 5

What factors influence the length of the budget period?

Answer 5

The length of the budget period can be influenced by

the type of budget,

nature of the organization,

need for periodic appraisal,

and prevailing business conditions.

Question 6

What is the budgeting process and who is typically involved?

Answer 6

The budgeting process starts with historical data collection and involves preparing a sales forecast based on various economic and market factors.

It often involves a budget committee, including top management and department heads.

Question 7

What is participative budgeting, and what are its advantages?

Answer 7

Participative budgeting is when lower-level managers are included in the budgeting process, which can lead to more accurate budget estimates and the perception of a fairer budget.

Question 8

What are the advantages and disadvantages of participative budgeting?

Answer 8

Advantages include more accurate estimates and increased motivation.

Disadvantages can be time-consuming processes and potential for budgetary slack, where managers may manipulate budget estimates.

Question 9

How should a budget be used as a management tool?

Answer 9

A budget should be used to evaluate performance and as an aid to achieving projected goals.

It should not be used as a means to enforce blame.

Question 10

What are the three key differences between budgeting and long-range planning?

Answer 10

Time period involved - Budgets typically cover shorter periods like a year, while long-range plans span over several years.

Emphasis - Budgeting is more detailed and focused on achieving short-term goals, whereas long-range planning identifies long-term goals and strategies.

Detail level - Budgets are more detailed and are used for performance evaluation, while long-range plans contain less detail and are aimed at setting a strategic direction.

Question 11

What is a master budget?

Answer 11

A master budget is a comprehensive financial plan made up of several individual budgets that outlines and forecasts the financial activities of a company over a period of time.

Question 12

What are the components of a master budget?

Answer 12

The components of a master budget include

operating budgets (sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expenses budgets)

and financial budgets (capital expenditure, cash, and budgeted balance sheet).

Question 13

What is the difference between operating and financial budgets?

Answer 13

Operating budgets relate to the primary activities of the business and are used to create the budgeted income statement, whereas financial budgets focus on the capital resources, detailing cash inflows and outflows and the company’s financial position.

Question 14

Fill in the blanks with appropriate terms: A ____________ shows potential sales for the industry and a company’s expected share of such sales.

Answer 14

A sales forecast shows potential sales for the industry and a company’s expected share of such sales.

Question 15

The ____________ is a set of interrelated budgets that constitutes a plan of action for a specified time period.

Answer 15

The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.

Question 16

How does participative budgeting affect the perception of lower-level managers?

Answer 16

Participative budgeting tends to result in lower-level managers perceiving the results as fair and achievable, as they are more involved in the budgeting process and its development.

Question 17

What is the primary focus of financial budgets within the master budget?

Answer 17

Financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.

Question 18

What is a sales budget and why is it important?

Answer 18

A sales budget is derived from the sales forecast and represents management’s best estimate of sales revenue for the budget period.

It’s crucial because it forms the basis for other budgets, affecting production and purchasing decisions.

Question 19

How do you determine the production budget?

Answer 19

The production budget is calculated using the formula:

Expected Sales Units + Desired Ending Finished Goods Units - Beginning Finished Goods Units = Required Production Units.

This budget ensures enough units are produced to meet sales expectations and maintain inventory levels.

Question 20

How is the direct materials budget prepared?

Answer 20

The direct materials budget is prepared by calculating the total units required for production and adjusting for beginning and desired ending inventory to determine the direct materials to be purchased.

Question 21

What are the potential consequences of an inaccurate sales budget?

Answer 21

An overly optimistic sales budget may lead to excess inventory that must be sold at reduced prices, while a conservative budget might result in lost sales and market share.

Question 22

How do you calculate the amount of direct materials required for production?

Answer 22

Multiply the units to be produced by the direct materials per unit required to find the total direct materials needed for production.

Question 23

How is the cost of direct materials purchases calculated?

Answer 23

The cost of direct materials purchases is calculated by multiplying the units of direct materials to be purchased by the cost per unit of these materials.

Question 24

Given that each unit requires 2 kg of raw materials and there are 3,100 units to be produced, how many kilograms of raw materials are required?

Answer 24

For 3,100 units at 2 kg per unit, you would need 6,200 kg of raw materials (3,100 units x 2 kg/unit).

Question 25

Why is the desired ending inventory an important component in the budgeting process?

Answer 25

The desired ending inventory is crucial for avoiding production stoppages or excessive inventory costs.

It ensures that the company can meet upcoming production needs without unnecessary disruptions or additional costs.

Question 26

How is the total direct labour cost calculated?

Answer 26

The total direct labour cost is calculated using the formula:

Units to Be Produced × Direct Labour Hours per Unit × Direct Labour Cost per Hour.

Question 27

Why is the direct labour budget critical for a company?

Answer 27

The direct labour budget is essential for maintaining a labor force that can meet expected levels of production and for keeping employment levels steady, which benefits both the employer and the employee.

Question 28

What two types of costs are included in the manufacturing overhead budget?

Answer 28

The manufacturing overhead budget includes

variable costs (like indirect materials, indirect labour, utilities, and maintenance per labour hour)

and fixed costs (such as supervisory salaries, depreciation, and property taxes).

Question 29

What are the two classifications of expenses in the selling and administrative expenses budget?

Answer 29

Expenses in this budget are classified as either variable or fixed.

Variable expenses fluctuate with sales volume, and fixed expenses do not vary with sales volume.

Question 30

What is the purpose of a budgeted income statement?

Answer 30

The budgeted income statement is used to project the expected profitability of operations for the budget period and provides the basis for evaluating company performance.

Question 31

How do you calculate the total cost per unit?

Answer 31

To find the cost per unit, add the direct materials, direct labour, and manufacturing overhead per unit costs.

Question 32

How is the budgeted cost of goods sold determined?

Answer 32

The budgeted cost of goods sold is determined by multiplying the units sold by the unit cost, which includes direct materials, direct labour, and manufacturing overhead costs.

Question 33

How is the manufacturing overhead
applied to production costs?

Answer 33

Manufacturing overhead is applied to production costs based on a predetermined overhead rate, which is often calculated by dividing total estimated overhead costs by estimated total labor hours or another cost driver.

Question 34

What is the purpose of a cash budget?

Answer 34

The cash budget is used to estimate the expected cash inflows and outflows over a period, helping management determine if the company will need to seek financing or will have excess cash for investment.

Question 35

What are the three main sections of a cash budget?

Answer 35

The cash budget typically consists of three sections:

cash receipts,

cash disbursements,

and financing, which includes the beginning and ending cash balances.

Question 36

When is the cash budget prepared in the budgeting process?

Answer 36

The cash budget is prepared after all other budgets have been completed because it uses information from these to project cash flows.

Question 37

Why is effective cash management important?

Answer 37

Effective cash management allows a company to avoid unnecessary borrowing costs and to identify when there will be surplus cash that could be used for investment or other purposes.

Question 38

What does the cash receipts section of a cash budget include?

Answer 38

It includes expected receipts from the main operations of the business, like cash sales and collections from credit sales, as well as other cash inflows like interest, dividends, and proceeds from asset sales.

Question 39

What are cash disbursements in the context of a cash budget?

Answer 39

Cash disbursements refer to projected cash payments, which can include payments for direct materials, direct labor, manufacturing overhead, selling and administrative expenses, taxes, dividends, and asset purchases.

Question 40

What information does the financing section of a cash budget provide?

Answer 40

The financing section outlines expected borrowings and repayments of loans, including interest, especially when there is a projected cash deficiency or when the cash balance is below the management’s minimum required balance.

Question 41

What is the purpose of a budgeted balance sheet?

Answer 41

A budgeted balance sheet projects the company’s financial position at the end of the budget period and helps in planning and control by showing the expected values for assets, liabilities, and equity based on the budgets.

Question 42

What key items are found on a budgeted balance sheet?

Answer 42

A budgeted balance sheet includes

current assets (like cash, accounts receivable, and inventory), l

ong-term assets (such as buildings and equipment),

current liabilities (like accounts payable),

and shareholders’ equity (including common shares and retained earnings).

Question 43

Why is it important to have accurate data when preparing a budgeted balance sheet?

Answer 43

Accurate data ensures the reliability of the budgeted balance sheet as a financial planning tool. It helps in making informed decisions regarding investments, financing, and operations management.

Question 44

What assumptions might be made when preparing a budgeted balance sheet?

Answer 44

Assumptions could include

the expected cash balance,

accounts receivable based on sales,

inventory levels,

depreciation expenses,

accounts payable from purchases,

and retained earnings after net income.

Question 45

How is budgeting applied in non-manufacturing companies like merchandisers and service enterprises?

Answer 45

Merchandisers use a merchandise purchases budget instead of a production budget.

Service companies focus on staffing and service delivery in their budgeting, coordinating professional staff with expected services to manage costs and ensure efficiency.

Question 46

How does budgeting differ for not-for-profit organizations compared to for-profit businesses?

Answer 46

Not-for-profit entities often budget based on cash flows (expenditures and receipts) rather than on a revenue and expense basis, focusing on the receipts needed to support planned expenditures, and they may follow strict line-item budgeting with

Question 47

What are the main components of a cash budget?

Answer 47

The main components include sections for

cash receipts,

cash disbursements,

and financing,

detailing expected cash flows and the beginning and ending cash balances.

Question 48

How do you calculate the ending cash balance in a cash budget?

Answer 48

To calculate the ending cash balance, start with the beginning balance, add total cash receipts, subtract total cash disbursements, and include any financing (borrowings less repayments).

Question 49

Why is a cash budget crucial for cash management?

Answer 49

A cash budget is crucial because it allows management to plan for cash surpluses or shortages, indicating when the company may need to invest excess cash or arrange financing.

Question 50

What is the process for creating a budgeted balance sheet?

Answer 50

The budgeted balance sheet is developed from the company’s previous year’s balance sheet, adjusted for the expected transactions of the current year’s budget.

Question 51

How does budgeting vary across different types of organizations?

Answer 51

Budgeting approaches differ in manufacturing, service, and not-for-profit organizations, tailored to their operations, with emphases on production, staffing, or cash flows respectively.