Chapter 11

Question 1

Budgets

Answer 1

A business should carefully plan for the future. A part of this planning process involves the preparation of a series of budgets. A budget is a plan of future business activities expressed in money terms.

Question 2

Advantages of Budgets

Answer 2

• A budget provides a business with a set of objectives to be met
• A budget helps to identify potential problems, such as, a likely future shortage of cash
• A budget helps co-ordinate business activities. All sections of a business must work together to implement the budget,
• A budget can motivate employees to achieve the objectives set
• A budget helps a business evaluate its performance. Actual results can be compared to expected results, areas of poor performance can be identified and corrective action can the be taken.

Question 3

Master Budget

Answer 3

A master budget is the name given to the full set of budgets prepared by a business for a period of time.
A master budget can be divided into two budget areas, the operating budgets and the financial budgets.

Question 4

Operating Budgets

Answer 4

The operating budgets are the set of budgets that provide the information required to prepare a budgeted income statement.
The operating budgets, for a manufacturing business, include a:
- sales budget
- production budget
- raw materials budget
- direct labour cost budget
- cost of sales budget
- other expenses budget
- budgeted income statement

Question 5

Financial Budgets

Answer 5

The financial budgets are the remaining budgets prepared by a business and include a:

• cash budget
• budgeted balance sheet
• capital expenditure budget

Question 6

Capital Expenditure Budget

Answer 6

The capital expenditure budget set out the type and cost of non-current assets that must be purchased in order to meet the objectives of the business for a given future period of time.

Question 7

Cash Budget

Answer 7

A cash budget shows the current cash balance, the future cash inflows and outflows of a business and the expected cash balance at the end of a budget period.
A cash budget can be prepared for a number of months of for a single period, such as, for one month or for one year.

Question 8

Cash Budget Performance Report

Answer 8

A report can be prepared that compares the budgeted results with the actual results. This type of report is known as a performance report.
A cash budget performance report consists of columns showing the budgeted and actual cash receipts and payments and a column showing the difference between these budgeted and actual figures.
A cash budget performance report can be prepared for a month or for a six month or yearly basis.

Question 9

Budgeted Income Statement Performance Report

Answer 9

A budgeted income statement performance report sets out the expected and actual income, expenses and profit or loss for a future period of time.
A budgeted income statement performance report is set out in the same was as a cash budget performance report.