L10- Profit planning and the role of budgeting

Question 1

What is a budget?

Answer 1

A quantitative expression of a proposed plan of action by management for a future time period

It aids in the coordination and implementation of the plan.

Question 2

What is budgeting?

Answer 2

The process of preparing a budget, putting the plan into action, and tracking progress

It involves planning specific actions to achieve overall business goals.

Question 3

List the advantages of budgeting.

Answer 3

• Planning (makes people think about the future)
• Coordination and Communication
• Motivation of managers
• Control profit (and operations)
• Evaluate performance and provide benchmark for evaluation

Question 4

List the disadvantages of budgeting.

Answer 4

• Can be time consuming
• Can be inaccurate and rigid
• Can result in biased forecasts
• “Use-it-or-lose-it” mentality

Question 5

What is a master budget?

Answer 5

A comprehensive expression of management’s operating and financial plans, summarised in budgeted financial statements

It includes both operating and financing decisions.

Question 6

What are the components of an operating budget?

Answer 6

• Supporting budget schedules
• Revenue budget
• Production budget in units
• Materials purchase budget
• Labour budget
• Cost of goods sold budget
• Non-manufacturing costs budget
• Budgeted P&L account

Question 7

What is responsibility accounting?

Answer 7

A system for evaluating the performance of managers based on activities under their supervision

Question 8

Define controllability in the context of responsibility accounting.

Answer 8

The degree of influence that a specific manager has over costs, revenues, or other items in question

A controllable cost is primarily subject to the influence of a given responsibility centre manager.

Question 9

What types of responsibility centres exist?

Answer 9

• Cost centre
• Revenue centre
• Profit centre
• Investment centre

Question 10

What is the conflict often encountered in budgeting?

Answer 10

Planning vs Motivation

Demanding budgets may motivate maximum performance but can be unsuitable for planning purposes.

Question 11

What is the significance of variance analysis in budgeting?

Answer 11

To assess adverse vs. favorable variances in performance compared to the budget

Question 12

Fill in the blank: A _______ is any part, segment, or sub-unit of a business that needs control.

Answer 12

responsibility centre

Question 13

What should be excluded from a manager’s performance report in responsibility accounting?

Answer 13

Uncontrollable costs

Question 14

What is the primary goal of budgeting?

Answer 14

To plan, coordinate, and control resources effectively

Question 15

What are Conflicting Roles of budgeting

Answer 15

–Planning vs Motivation
–Planning vs Performance Motivation (Control)

Question 16

Describe Planning vs Motivation

Answer 16

Demanding budgets that may not be achieved may be appropriate to motivate maximum performance, but they are unsuitable for planning purposes

Question 17

Describe Planning vs Performance Motivation (Control)

Answer 17

If budgeted sales are used to evaluate the salespeople at the end of the year then salespeople have an incentive to under forecast future sales

Question 18

What are the 2 types of budgeting period

Answer 18

–Operating Budget
–Rolling Budget

Question 19

Describe Operating Budget

Answer 19

Once per year, the manager of each budget centre prepares a detailed budget for one year

Question 20

Describe Rolling Budget

Answer 20

It ensures that a 12 month budget is always available by adding a quarter in the future as the quarter just ended is dropped

Question 21

Define the variance (for budget)

Answer 21

The difference between the budgeted performance measure and an actual performance measure

Question 22

Define Adverse Variance

Answer 22

Actual Costs are greater than the budgeted ones OR actual revenues are less than budgeted Revs

Question 23

Define Favourable Variance

Answer 23

Actual costs are less than the budgeted ones or actual revenues are greater than budgeted ones

Question 24

What are the 4 Budgeting Philosophies

Answer 24

–Top Down
–Bottom Up
–Incremental
–Zero-Based

Question 25

Advantage and Disadvantage of top down

Answer 25

+Less coordination and less time consuming
-Less accurate and achievable

Question 26

Advantage and Disadvantage of Bottom up

Answer 26

+More Accurate and Achievable
-More coordination and more time consuming

Question 27

Advantage and Disadvantage of Incremental

Answer 27

+Less time consuming
-Might be inaccurate (future vs past)

Question 28

Advantage and Disadvantage of Zero-based

Answer 28

+Might be more accurate
-More time consuming

Question 29

Define Operating Decisions

Answer 29

are about the use of scarce resources

Question 30

Define Financing decisions

Answer 30

deal with how to obtain the funds to acquire those resources.

Question 31

Components of Financing Decisions

Answer 31

• Capital budget
• Cash budget
• Budgeted balance sheet
• Budgeted statement
  of C/F

Question 32

Define Cost Centre

Answer 32

reports only costs

Question 33

Define Revenue Centre

Answer 33

reports only revenues

Question 34

Define Profit Centre

Answer 34

reports revenues, expenses and net profit or net loss

Question 35

Define Investment Centre

Answer 35

reports revenues, expenses, profit or loss and the investment used by the centre.

Question 36

What is a controllable cost

Answer 36

is any cost that is primarily subject to the influence of a given responsibility centre manager for a given time period.

Question 37

What does responsibility accounting focus on

Answer 37

information and knowledge, not control.