CHAPTER 18 - BUDGETS

Question 1

List the main budgets produced

Answer 1

Sales

Production

Cash

Question 2

List the reasons for preparing budgets

Answer 2

Planning for future

Control of costs

Sets goals / targets (motivator)

Communication channel between management levels

Cross department co-ordination

Monitoring performance against budget

Question 3

What is considered when preparing the Sales Budget?

Answer 3

Current sales levels

Trends over recent years

Sales team input - what’s selling?

State of order book - future orders

Market conditions

New entrants to market

Competition

Seasonal factors

Question 4

What elements are used in a Production Budget?

Answer 4

Closing Stock + Sales - Opening stock

= Production Units required

Question 5

How do we forecast closing stock in a production budget?

Answer 5

Usually told that it needs to be a percentage of the following month’s sales

Question 6

Describe the 2 types of variance for Sales and Costs

Answer 6

Sales

Higher than budget = favourable

Lower than budget = adverse

Costs

Higher than budget = adverse

Lower than budget = favourable

Question 7

What is budgetary control?

Answer 7

Where we investigate variances over a certian % (6%)

Question 8

List the steps in the budgetary cycle

Answer 8

Forecast

Monitor

Review

Amend

Question 9

Why is a cash budget prepared and what does it contain?

Answer 9

To confirm where shortfalls and surpluses will occur

So expenditure and overdraft/loans/transfers can be arranged

Shows where cash will actualy be paid out and received

Question 10

Name the 4 principles of cash budgeting

Answer 10

1. Allow for timing differences between sales/purchases and payments
2. Non-trading activity must be included (capital expenditure, dividend payments etc)
3. Provisions for depreciation and doubtful debt should be ignored
4. Opening balances for debtors / Creditors / cash taken from balance sheet for previous period

Question 11

How do we calculate the sales receipt figure on the cash budget?

Answer 11

Credits Sales for month + opening debtors - closing debtors

Where there are different payment terms you need to distribute the receipts for each month of sales across the number of months they will be paid in and then add up each month’s total receipts

Question 12

How do we calculate the payments to creditors (materials) figure on the cash budget?

Answer 12

Credit purchases for month + opening creditors - closing creditors

Could be a set % of sales per month if stock levels are stable

Question 13

How do we treat wages and payments to overhead creditors on the cash budget?

Answer 13

Wages - paid during month they are earned

Overheads - usually similar each month so add a constant amount per month

Question 14

What are inflows and outflows on a cash budget

Answer 14

Receipts plus payments

Positive value is an inflow

Negative value is an outlfow