Flexible Budgets and Actiity Based Budgeting

Question 1

Budget definition

Answer 1

Detailed quantitative plan that specifies how resources will be acquired and used during a given period of time

Question 2

Master budget

Answer 2

Covers all phases of company’s operations:
- sales, production, direct costs, manufacturing overhead, administrative and general, cash, pro-forma financial statements

Question 3

Functions of budgets

Answer 3

• planning
• communication and coordination
• efficient allocation of limited resources
• controlling operations
• evaluating performance

Question 4

Activity based budgeting (ABB)

Answer 4

• develop master budget using ABC analysis
  Process:
  Forecast of products > activities > resources

Question 5

Static budgets

Answer 5

Forecast of revenues and expenses at specific level of output

Question 6

Disadvantages of static budget

Answer 6

Not a fair evaluation: if output is affected, less output will reflect on less costs

• unfavorable or favorable variances are not relevant
• lower costs are due to lower activity rather than good cost control

Question 7

Flexible budget

Answer 7

Budget plan that flexes depending on level of the relevant range of activity

Question 8

Formula of flexible OH budget

Answer 8

Total budgeted OH = (budgeted VC per activity unit x # of activity units) + budgeted fixed OH cost

Question 9

Advantages of flexible budgets

Answer 9

• shows revenues/expenses at actual level of activity
• prepared for any level in revelaba range
• reveal variances due to cost control or lack of control
• improve performance evaluation

Question 10

Variable overhead variances

Answer 10

• spending variance: whether company has spent less or more than expected
• efficiency variance: whether company required more or less time than expected

Question 11

Fixed overhead variance

Answer 11

• Budget variance: how much or less company spent in fixed costs compared to budget
• volume variance: shows how much or less company

Question 12

Activity based flexible budget - concept and benefits

Answer 12

• identify different cost drivers for different costs
• prepare budget based on different drivers
• fixed costs may vary in relation to cost driver
• more accurate prediction and OH cost benchmark

Question 13

Participative budgeting

Answer 13

• use of input from low and middle management employees
• time consuming but enhances motivation and goal acceptance
• lower level employees are more aware of costs and revenues than top

Question 14

Budgetary slack

Answer 14

• revenue/cost projection vs realistic estimate of revenue/cost
• lower level build slack so budget is easier to accomplish

Question 15

Solutions to budgetary slack

Answer 15

• only as planning tool rather than performance evaluation

- if using as performance evaluation, reward managers for accurate estimates

Question 16

International challenges when budgeting

Answer 16

• translation of foreign currencies
• economies fluctuate in different countries - variability
• budget preparation is difficult when inflation (or deflation) is high/unpredictable