Lecture 9: Budgeting

Question 1

Budgeting

Answer 1

Allows a business to predict their future financial positition or performance and their future goals - able to use a budget to make targets and guide performance so that they can meet the budget

Question 2

Strategic planing

Answer 2

Planning focusing on the broad, overall direction of the business, considering large issues such as expansion, resturcturing or new product development.

Question 3

Budgeting process

Answer 3

1. Planning - considering decisions such as the duration, realism, adjustability, approach and timing of the budget
2. Control - implementation of the budget, evaluating out performance throughout the period and reviewing our end performance

Question 4

Master budget

Answer 4

Interrelated budgets covering all aspects of the business including the operational and financial budgets

Question 5

Operational budgets

Answer 5

1. Sales budget - prepared for each product/service line (expected volume of sales x intensed slling price)
2. Purchases budget - determines the colume of production/purchases needed to meet the sales budget
3. Operating expense budget - includes seperate budgets for each cost centre beween gross profit and EBIT

Question 6

Financial budgets

Answer 6

1. Budgeted profit and loss statement - combines the individual operating budgets
2. Capital expenditure budget - related to planned expenditure on net capital accumulation
3. Cash budget - prediced cash receipts and patments relating to operating and investing activites - will determine the levels of financing activities needed to meet the other cash obligations - prepared on a month-by-month basis
4. Budgeted balance sheet - the result of the previous balance sheet data with the budgeted income statment, cash budget and capital expenditure budget imposed upon it

Question 7

Critical evaluation of common budgeting process approaches

Answer 7

• Budgetary slack - may occur because of a participitative approach to ensure that the target is easily achieved
• Discretionary spending - unnecessary spending to rais expenses to ensure that future busgets are not cut
• Deferring incurring expenses in the period - to make sure the expense targerts are not exceeded
• Lack of motivation except towards the target - once the target is met performance slows down
• Difficulty of authoritarian set target - demotivates managers who feel it is unreachable
• Figure may already be known

Question 8

Incremental v. zero-based budgeting

Answer 8

Incremental is where the previous years figures are used as a base and increases/decreases are justified with these figures
Zero-based is where each figure is developed from scratch with a cost-benefit analysis

Question 9

Variance reports

Answer 9

Created at the end of the period to determine the differences between actual and budgeted forecasts - once these are identified management will determine which are significant and then analyse why these occured and then take corrective action.