E-Finance CH2

Question 1

What is a master budget

Answer 1

Budget for sales, raw materials, labour, marketing, financial, operating etc

Question 2

What is the purpose of budgeting

Answer 2

1. Planning
   -forecast future profit and loss
   -forsee possible financial difficulties so measures can be taken to deal with problems
2. Coordinating
   - enable communication because a change in budget affects many different departments
3. Controlling
   - monitor and evaluate performance of different departments
   - do budgetary control

Question 3

What are the principles of budgeting

Answer 3

1. Analysis must be forward-looking
2. process should be well organized and need involvement of all departments
3. Budget clearly presented and attainable
4. Clearly defined responsibilities of managers
5. Compare budgets with actual results
6. Use budget as a tool for improvement
7. Adjustment of budgets should be allowed under certain circumstances during implementation period

Question 4

Usefulness of budget

Answer 4

1. Encourages departments to plan ahead
2. Improving communications and coordination within a firm
3. Provide benchmarks to evaluate performances of departments and employess
4. Saving management time and effort

Question 5

Limitations of budgets

Answer 5

1. Difficult to forecast the ever-changing business market
2. Cannot subsitude for sound management decisions
3. May hinder employees from achieving excellence
4. Adequate training needed of budgeting staff
5. Costly and time consuming

Question 6

What is the budgeting variance

Answer 6

DIfference between budgeted and actual amount

Question 7

What are the different budgeting variances

Answer 7

1. Sales variance
2. Material variance
3. Labour variance

Question 8

What are the different causes of sales variance

Answer 8

1. Selling price
2. Sales volume
3. Product mix

Question 9

What are the different causes of material variance

Answer 9

1. Material price
   - inflation
   - received lower discount than expected
   - couldn’t obtain discounts due to buying raw materials in smaller amounts
2. Material usage
   - used raw materials of lower quality
   - theft of raw materials
   - employed less skilled workers

Question 10

What are the different causes of labour variance

Answer 10

1. Wage rate
   - used workers of higher grade than needed
   - labour union demanded higher wage rate
2. Labour efficiency
   - firm used unsuitable workers
   - low morale of workers
   -workers worked overtime to earn overtime compensation