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CIMA P1 - Management accounting > Chapter 7 - Preparing budgets > Flashcards

Chapter 7 - Preparing budgets Flashcards

1
Q

What are the purposes of budgets?

A
  • Planning
  • Control and evaluation
  • Co-ordination
  • Communication
  • Motivation
  • Authorisation
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2
Q

What are some advantages of budgeting?

A
  • Actions and goals aligned
  • Forces management to consider future
  • Better prepared for change
  • Improve decisions
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3
Q

What are some disadvantages of budgeting?

A
  • Time consuming
  • Subjective
  • Create conflicts
  • Encourages short-termism
  • Deters innovation
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4
Q

What are the difficulties of budgeting for global companies?

A
  • Currency
  • Legal framework
  • Customer tastes
  • Competitor actions
  • Political climate
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5
Q

What is the principal budget factor?

A

Key resource is in short supply and affects planning decisions

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6
Q

What is a sales budget?

A

How many units can be sold

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7
Q

What is a production budget?

A

How many units must be produced to meet budgeted sales

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8
Q

How is the production budget calculated?

A

Sales budget
Closing inventory finished
(opening inventory)

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9
Q

What are raw materials, labour and overheads budgets based on?

A

Production budget

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10
Q

What 2 parts make up the raw materials budget?

A
  • Materials purchases
  • Material required in production
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11
Q

How is the materials purchases budget calculated?

A

Materials required
Wastage
Total material requirement
Closing inv raw mat
(Opening inv raw mat)

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12
Q

How is total production calculated?

A

Sales budget
Closing inv finished
(Opening inv finished)
Good production required
Faulty production

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13
Q

How is direct labour calculated when variable?

A

Production budget x direct labour cost per unit

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14
Q

What is the overhead budget based on?

A

Budgeted overhead absorption rates

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15
Q

What is included as part of non-production budgets?

A

Selling and distro costs

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16
Q

How is the master budget summerised?

A

Budgeted:
- P/L
- Cash budget
- SOFP

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17
Q

What is a cash forecast?

A

Estimate of cash receipts and payments for a future period under existing conditions

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18
Q

What is the purpose of a cash budget?

A
  • Plan for cash deficits and surpluses
  • Compare with actual spending
  • Assess and integrate operating budgets
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19
Q

Why do cash receipts and payments differ from sales and COS in the P/L?

A
  • Not all cash receipts/payments affect P/L
  • Not all items in P/L are cash
  • Timing differences
  • Irrecoverable debts never received in cash
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20
Q

What are the steps to prepare a cash budget?

A
  1. Layout
  2. Fill in simple figures
  3. Work out complex figs
  4. Calc closing cash bal
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21
Q

What will a cash budget layout typically include?

A
  • Clear distinction between cash receipts and payments
  • Net cash flow for each period
  • Closing cash balance for each period
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22
Q

What are the simple figures that are filled in?

A
  • Wages and salaries
  • FOH expenses
  • Dividends
  • Purchase of NCA
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23
Q

What are the more complex figures?

A

Info on sales and purchases:
- Timing must be found from credit periods
- VOH may require info about production levels
- Purchases may require calcs based on production schedules and inv balances

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24
Q

What are some examples that need to be considered when interpreting a cash budget?

A
  • Balance at period end
  • Is there sufficient finance
  • Best time to make discretionary expenditure
  • Plan for dealing with surpluses
  • Key causes of deficits
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25
Q

What is sensitivity analysis?

A

Revising the budget on the basis of a series of varied assumptions

One assumption can be changed at a time

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26
Q

What does a stress test do?

A

Examine how a budget would perform/function under severe/unexpected pressure

27
Q

What re some of the sources of business stress?

A
  • sudden economic changes
  • cybersecurity attacks
  • Loss of a major customer
  • Foreign exchange rate risk
  • Industrial action
28
Q

What are some of the purposes of stress testing?

A
  • Quantify risks
  • Warning signs for stress events
  • Tailored software
29
Q

What are some sources of budget data regarding sakes?

A
  • General economic data
  • Public announcements
  • Historical sale trends
  • Market research
  • business unit consultation
30
Q

How is big data useful?

A

Can be analysed to provide insights that lead to better informed decisions

31
Q

What are sources of big data?

A
  • Media
  • Internet
  • Machine generated
  • Databases
32
Q

What are the benefits of big data?

A
  • Competitive advantage
  • Drives innovation
  • Improves productivity
33
Q

How can big data help stress testing?

A
  • Identify stress events
  • Quantify effect of stress events
  • Test validity of assumptions
  • Identify correlation
  • Create/identify warning signs
34
Q

How can the 4 V’s cause issues?

A
  • Volume - not all data relevant
  • Variety - no consistency in how big data is presented
  • Velocity - software plays critical role
  • Veracity - increased risk of inaccuracies
35
Q

What are the problems in performing big data analytics?

A
  • Data freely available and can be used by others
  • Requires significant investment
  • Distorted by outliers
36
Q

What is a periodic budget?

A

Shows costs and revenues one period at a time

37
Q

What is a rolling budget?

A

Budget that is continuously updated

38
Q

Why may companies use a rolling budget?

A
  • Accurate forecasts cannot be made
  • Areas of business that need tight control
39
Q

What are the advantages of rolling budgets?

A
  • Reduce uncertainty in budgeting
  • Used for cash management
  • Force managers to continuously look forward
  • More realistic in a changing environment
40
Q

What are the disadvantages of a rolling budget?

A
  • Time consuming
  • Difficult to communicate frequent changes
41
Q

What is incremental budgeting?

A

Take previous year’s budget and add on % to allow for inflation and cost increases

42
Q

What are the advantages of incremental budgeting?

A
  • Simple
  • Low cost
  • Quick to administer
  • Suitable in stable environments
  • Practical
43
Q

What are the disadvantages of incremental budgeting?

A
  • Backward looking, unsuited to changing environments
  • Assumes all current activities are continued
  • Encourages over-spending
  • Unchallenging targets
  • Consideration not given
44
Q

How can the problems of incremental budgeting be solved?

A

By using Zero based budgeting (ZBB)

45
Q

What is ZBB?

A
  • All activities are re-evaluated each time a budget is formulated
  • Assumes function doesn’t exist and is at 0 cost
46
Q

What is ZBB suitable for?

A
  • Allocating resources in areas where spend is discretionary
  • Public sector organisations
  • New functions
47
Q

What is the 4 step process for implementing ZBB?

A
  1. Determine activities that are to be used as the object of decision packages
  2. Request managers to prepare alternative decision packages
  3. Rank packages in order of contribution
  4. Fund decision packages based on ranking
48
Q

What are the 2 types of decision packages?

A
  • Mutually exclusive
  • Incremental
49
Q

What is a mutually exclusive decision package?

A

Different methods of meeting same objective

50
Q

What is an incremental decision package?

A

Divides activity into different levels of service/support needed to carry out activity

51
Q

What are the advantages of ZBB?

A
  • Creates organisational environment where change is accepted
  • Better focus on goals
  • Forces managers to examine activities
  • Establishes measure of performance for each decision package
  • Gets managers involved in the budgeting process
52
Q

What are the disadvantages of ZBB?

A
  • Time consuming
  • Temptation to concentrate of short-term cost saving
  • Requires budgeting skills
  • Ranking process can be hard
  • Rigid
53
Q

What is Activity based budgeting (ABB)?

A

Budgeting based on an activity framework utilising cost driver data

54
Q

What is the basic approach of ABB?

A
  • Identify cost drivers
  • Calc cost driver rate
55
Q

What are the advantages of ABB?

A
  • Draws attention to costs of overhead activities
  • Recognises that activities drive cost
  • Provides info for TQM
56
Q

What are the disadvantages of ABB?

A
  • Expensive
  • Relies on ABC
57
Q

What is beyond budgeting?

A

Companies moving away from traditional budgeting techniques

58
Q

When are beyond budgeting approaches most commonly used?

A

Organisations that face regular environmental changes or where continuous improvement is critical

59
Q

What are some common features of beyond budgeting?

A
  • Use of rolling budgets
  • Wide range of performance measures
  • Targets set on benchmarks observed externally
  • Greater focus on future
  • Innovation encouraged and rewarded
  • Budgets set locally
60
Q

What are the advantages of beyond budgeting?

A
  • Continuous planning
  • Targets more challenging
  • More Innovative
  • Managers involved in decision making
  • Decisions taken quicker
  • Creates info systems
61
Q

What are the disadvantages of beyond budgeting?

A
  • Planning more complicated
  • Effort reduced when trying to achieve unrealistic benchmarks
  • Organisational goals less clear
  • More accurate and up to date info required
62
Q

How is total available labour hours calculated to incorporate idle time?

A

Hours/% of hours worked excluding idle time

63
Q

What category of overhead is rent?

A

Admin

64
Q

Is a royalty a direct cost?

A

Yes, not included in overhead budget

CIMA P1 - Management accounting (14 decks)

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