MABU - Management Accounting Budgeting

Question 1

What are the 4 cost behaviors?

Answer 1

1) Variable Costs

2) Fixed Costs

3) Stepped Fixed Costs (or Semi-fixed costs)

4) Semi-Variable (or mixed) Costs

Question 2

Which Cost behaviour uses the High-Low Method?

Answer 2

Semi-Variable Costs (or mixed)

Question 3

What are the 4 steps to the High-Low Method?

Answer 3

Step 1 - Take the highest & lowest sets of data

Step 2 - Calculate the highest output minus the lowest output. Then the highest cost minus the lowest cost.

Step 3 - Divide the cost by the output from the answers in step 2 to get the variable cost per unit.

Step 4 - Calculate the fixed cost using the TC = FC + (VC per U x highest output) then minus that amount off the TC to give you the fixed costs.

Question 4

What are Variable Costs?

Answer 4

Variable costs increase in line with production. The more units produced, the higher the total cost will be.

Question 5

What are the 5 Budgeting Systems?

Answer 5

Incremental Budgeting
Zero Based Budgeting
Rolling Budgets
Activity Based Budgeting
Priority Based Budgeting

Question 6

What does the mnemonic ‘PRIME’ stand for in the purposes of budgeting?

Answer 6

Planning
Responsibility
Integration
Motivation
Evaluation & control

Question 7

What is a budget?

Answer 7

A budget is a financial and quantitative plan of what an organisation intends to achieve for a forthcoming period

Question 8

What are the four stages of the budgetary cycle?

Answer 8

1) Objectives
2) Budgets
3) Operating
4) Comparison

Question 9

When looking at budgets, what are the 4 various sorts of data that can be used to turn the data to information?

Answer 9

1) Quantitative data
2) Qualitive data
3) Primary data
4) Secondary data

Question 10

When forecasting sales, what 4 could we make use of to gather information?

Answer 10

1) Sales experts
2) Market research
3) Time series analysis
4) Linear regression

Question 11

When forecasting expenditure, what 4 can we make use of to gather data?

Answer 11

1) Production & purchase managers
2) Market research
3) Time series analysis & linear regression
4) Price indices

Question 12

If forecasting sales units for next year, who in the business would you ask in order to gather the information?

Answer 12

Sales & marketing managers

Question 13

If forecasting materials costs for next year, who in the business would you ask in order to gather the information?

Answer 13

Purchasing manager for purchase prices
Production manager for the required quantity

Question 14

If forecasting average employees in each department for next year, who (3) in the business would you ask in order to gather the information?

Answer 14

Department managers
HR managers
Payroll managers

Question 15

What are the 3 main approaches to improve budgets?

Answer 15

1.) Time series analysis

2.) Linear regression

3.) Index numbers

Question 16

What is Time Series Analysis?

Answer 16

A series of figures recorded over a period of time.

Example - Sales per month for the last 3 years (which would be a series of 36 figures).

Question 17

What are the 4 components of a time series?

Answer 17

1.) Trend
2.) Seasonal variation
3.) Cyclical variation
4.) Random variation

Question 18

What are the 2 models that can be used to determine how the trend and seasonal variation figures combine to give a forecast time series?

Answer 18

1.) The additive model - (TS = T + SV)

2.) The multiplicative (or proportional) model - (TS = T x SV)

Question 19

What are the 3 steps to identify trend figures using moving averages?

Answer 19

1.) Find the trend

2.) Identify the seasonal variation

3.) Forecast future figures

Question 20

Would electricity to heat the offices be a fixed or variable cost?

Answer 20

Fixed - This is not affected by the changes in volume.

Question 21

Would purchases of wood be fixed or variable?

Answer 21

Variable - Increasing production volume will require more wood.

Question 22

Would wages of production staff be a direct or indirect cost?

Answer 22

Direct - A certain number of labour hours could be traced to each unit.

Question 23

Would wood used to make tables be a direct or indirect cost?

Answer 23

Direct - A certain quantity of wood could be traced to each unit

Question 24

Would wages of staff who stitch suitcases together be a fixed or variable cost?

Answer 24

Variable - Increasing the production volume will require more hours of direct production workers

Question 25

Would rates for the factory be fixed or variable costs?

Answer 25

Fixed - This will be unaffected by the volume of production

Question 26

What does Absorption costing include?

Answer 26

Selling price less all costs (included fixed cost)

Question 27

What does Marginal costing include?

Answer 27

Selling price less direct & variable costs. Does not include fixed cost.

Question 28

What would be the accounting treatment for basic wages for production workers?

Answer 28

This would be a Direct cost as it can be traced to units of production.

Question 29

what would be the accounting treatment for costs in the stores department?

Answer 29

Activity based charge to products (ABC) - The cost will be driven by the activity in the stores department. (i.e. the number of issues of material made).

Question 30

From the pneumonic “P.R.I.M.E”, explain Planning

Answer 30

The process of budgeting forces managers to look at the future and to set out detailed plans that will allow them to achieve targets in each department. This will make it easier for the business as a whole to deliver targeted performance for shareholders and investors

Question 31

From the pneumonic “P.R.I.M.E”, explain responsibility

Answer 31

A budget will identify who is responsible for achieving the targets within the budget for each cost centre. The manager in charge of each area of the budget is often referred to as the ‘budget holder’. Delegating responsibility in this way means that head office will know who to contact if there are any problems in achieving targets, or to praise those who met or even surpassed their targets, in a department.

Question 32

From the pneumonic “P.R.I.M.E”, explain integration

Answer 32

A budget will ensure the activities of the different parts of the organisation are smoothly integrated. This will assist good communication and co-ordination between departments is happening and encourage the business to operate as efficiently as possible.

Question 33

From the pneumonic “P.R.I.M.E”, explain motivation

Answer 33

A budget will help to motivate staff within the organisation by setting targets for them to achieve. This is particularly effective if the pay of staff is linked to achievement of the budgets. For budgets to prove a truly motivational target they must be challenging but achievable. If a budget is seen by staff as being impossible to achieve they are unlikely to make any real effort to try to achieve it.

Question 34

From the pneumonic “P.R.I.M.E”, explain evaluation & control

Answer 34

A budget will allow evaluation of the actual results of the business. We can compare the actual results of the business to the budgets to see if the managers have beaten the targets or fallen short. This process is known as ‘control’ and will allow management to improve the performance of the business in future.

Question 35

What are 4 advantages of Top-Down budgeting?

Answer 35

1) The best use of resources as senior management will be best placed to make those decisions.

2) Senior managers may need to set the budgets if operational managers lack the required skills or experience to do so.

3) Senior managers will be able to see the big picture and overall corporate objectives which may be ignored by departmental managers.

4) This gives senior managers greater control over the budgeting process.

Question 36

What are 4 Disadvantages of Top-Down budgeting?

Answer 36

1) Senior management lack local knowledge so may set budgets that lack relevance to the conditions faced by different regional operations.

2) Targets may be unrealistic or unachievable as the senior managers are too demanding in their expectations.

3) Poor use of senior manager time as they should be focusing on strategic considerations.

4) Could be de-motivating to staff expected to achieve the targets imposed on them as they have no input to the process and feel their views are not being listened to.

Question 37

What are 5 advantages of bottom-up budgeting?

Answer 37

1) Operational management are likely to have better local knowledge so should set more meaningful budgets.

2) Local managers will have better understanding of what is possible for their teams to achieve which in turn will make targets more realistic & achievable.

3) Frees up the senior management so they can look at longer-term and more strategic planning.

4) More motivating for the staff involved in the budget setting process as they will see the impact of their work on the overall business direction.

5) Lower level managers will have more involvement in determining the future direction of the business which will help build their skills as managers.

Question 38

What are 5 disadvantages of Bottom-up budgeting?

Answer 38

1) Can be time consuming as many different departments will be involved.

2) Operational managers may lack the required skills which will either lead to poor budgets being set or considerable costs incurred to train them.

3) Lack of goal congruence - might be too many conflicting views on what should be set as a budget as each department will try to get what they want at the expense of other departments.

4) Budgetary slack - targets may be set too easy to achieve as staff may make them easy.

5) Budgets may lack consistency when different departments try to pursue their own desired objectives. One department may be trying to make profit by cutting costs whilst another department may be focusing on maintaining the highest level of quality.

Question 39

What is negotiated budgeting?

Answer 39

This is where budgets are agreed between different levels of management (mainly in practice). This is then reviewed and amended by senior management by making it more challenging and then sent back to the departments. The local managers will make their own revisions to make sure the targets remain realistic. In this way a compromise budget can be reached that all parties are happy with.

Question 40

What is incremental budgeting?

Answer 40

This is where a budget is adjusted for the for the following year by adding inflation, market growth or other factors. Known as an increment to this years budget.

Question 41

What are 3 advantages of incremental budgeting?

Answer 41

1) The budget is stable and changes are gradual over time which will be easier for staff to cope with.

2) The system is relatively simple to understand. Often just involves adding a percentage to the current budget which in turn limits the number resources required to produce the budget.

3) Co-ordination between department budgets is easier to achieve as their budgets will change at the same rate.

Question 42

What are 3 disadvantages of incremental budgeting?

Answer 42

1) Last years budget could be largely irrelevant to next year as some businesses may radically alter what they do each year, where incremental budgeting assumes activities and ways of working will be the same each year.

2) No incentive to cut costs due to the fact the budget will increase year on year. If there is budgetary slack built in to the budget for one year, it will be automatically put back into the budget the following year.

3) Incremental budgeting encourages departments to spend the full amount of their cost budgets rather than try to save money. The department manager will want to make sure that they spend their full budget allocation otherwise their budget may be cut the following year. This is likely to lead to inefficiency and waste of money in the business.

Question 43

What is Zero based budgeting?

Answer 43

This is the opposite to incremental budgeting. This starts with a zero budget. Every item of expenditure needs to be justified by managers even from previous years and nothing is taken for granted.

Question 44

What are 3 advantages of zero based budgeting?

Answer 44

1) More efficient allocation of resources as all spending needs to be justified. This should eliminate any budgetary slack.

2) Drives managers to find cost-effective ways to improve operations and identifies opportunities for saving money (i.e. by outsourcing). This is likely to lead to improved profits for the business as a whole.

3) Increases staff motivation by providing greater involvement and responsibility in decision making.

Question 45

What are 4 disadvantages of zero-based budgeting?

Answer 45

1) Very time consuming as every single aspect of the budget has to be re-examined each year.

2) Managers may become demotivated due to having to justify every detail of expenditure every year.

3) Training will need to be provided to managers. This type of budgeting will need to be understood by managers at several different levels.

4) Communication may be affected as more managers are involved in the process which can make it more difficult to administer.

Question 46

What are the 4 stages for the product life cycle?

Answer 46

1) Introduction stage

2) Growth stage

3) Maturity stage

4) Decline stage

Question 47

What is the Introduction stage in the product life cycle?

Answer 47

The introduction stage is where costs are higher due to advertising, marketing & promoting the new product. At this stage there will be minimal revenue. Product will need to be monitored to ensure it grows at a suitable rate, if this doesn’t grow, maybe discontinue the product.

Question 48

What is the growth stage of the product life cycle?

Answer 48

This is where there should be a rapid growth in sales and cash flow. There should still be heavy expenditure in advertising to keep gaining market share. The outputs should increase which could in turn lead to lower production costs per unit due to economies of scale.

Question 49

What is the maturity stage of the product life cycle?

Answer 49

This is where the competition is at its highest as other companies fight to maintain their market share of the product. This is when most of the profit is earned. Any expenditure will be for upgrading or improving the product. Marketing will still need to be done and measures to improve production efficiency and quality.

Question 50

What is the decline stage of the product life cycle?

Answer 50

This is when the demand for the product starts falling due to new products and advanced technology slowly making the product obsolete. Marketing will need to be reduced as profits fall.

Question 51

What are the 4 types of standard (targets)?

Answer 51

1) Ideal standard

2) Attainable standard

3) Basic standard

4) Current standard

Question 52

Explain the usefulness of ‘Ideal standard’ (target).

Answer 52

This is where there no allowance for waste, inefficiency or idle time with perfect operating conditions. This can be de-motivating for staff as nothing is ever perfect.

Question 53

Explain the usefulness of ‘Attainable standard’ (target).

Answer 53

This target is more realistic as it allows for a challenging level of wastage and inefficiency. This gives staff more incentive to work hard to meet the targets set.

Question 54

Explain the usefulness of ‘Basic standard’ (target).

Answer 54

This is the original target set which could be from a long time ago which could make it out of date. Therefore makes it a less meaningful target for the current production activities.

Question 55

Explain the usefulness of ‘Current standard’ (target).

Answer 55

The current standard provides no real incentive to improve. The target is based on current levels of efficiency and assumes the current cost levels will be maintained. This just tells us how we are doing currently.

Question 56

What are 3 steps to motivate managers to achieve budgets?

Answer 56

1.) Involve managers in the planning process so that budgets are not set at unachievable levels.

2.) Communication - Managers should be kept informed and communicated to so they can understand the part they have to play in achieving budgets.

3.) Performance targets - Making sure the targets are challenging but achievable and offering incentives i.e. bonus, salary increases to keep managers motivated.