Module 4 Budgetary Planning

Question 1

What are the 6 areas that helps the business by preparation and ongoing use of budget?

Answer 1

1) Planning

2) Communicating

3) Co-ordinating

4) Controlling

5) Motivating

6) Evaluating

Question 2

What is the typical sequence of a budget?

Answer 2

1) Sales budget
2) Production budget
3) Overheads budget
4) Research and development budget
5) Administrative budget
6) Master budget

Question 3

What are some weaknesses of budgeting?

Answer 3

• Oppressive
• Unpopular
• Limiting managers activities
• Reducing resources whilst demanding higher output

Question 4

What are the approaches to budgeting?

Answer 4

• Incremental budgeting
• Zero based budgeting (ZBB)
• Rolling budgets
• Activity based budgeting (ABB)

Question 5

What is incremental budgeting?

Answer 5

Updates prior year figures by a percentage, often accounting for inflation or expected activity changes.

Question 6

What are advantages of incremental budgeting?

Answer 6

• Simple
• Easy to apply
• Easy to understand

Question 7

What are disadvantages of incremental budgeting?

Answer 7

• Perpetuates past inefficiencies

Question 8

What is Zero Based Budgeting?

Answer 8

Starts each budget cycle with zero allocation, requiring departments to justify their budgets from scratch

Question 9

What are advantages of zero based budgeting?

Answer 9

-Allocates resources based on need and value for money
- Increased participation of employees in the budgeting process

Question 10

What are the disadvantages to zero based budgeting?

Answer 10

• Can be very time consuming
• Can be difficult to perform

Question 11

What is Rolling budgets?

Answer 11

Continuously updated, typically on a monthly or quarterly basis

Question 12

What are the advantages of Rolling budgets?

Answer 12

-More realistic
- More achievable

Question 13

What are the disadvantages of Rolling Budgets?

Answer 13

Can incentivize budgetary slack?

Question 14

What is Activity Based Budgeting (ABB)?

Answer 14

Creates budgets based on major activities

Question 15

What are advantages to Activity Based Budgeting (ABB)?

Answer 15

-Ability to set more realistic budgets
- Better identification of resource needs
- Linking of costs to outputs

Question 16

What are disadvantages to Activity Based Budgeting (ABB)?

Answer 16

-It is expensive due to the additional resources required
- Slower process

Question 17

What is a cost centre?

Answer 17

This is an area that does not generate any revenue

E.g HR department

Question 18

What is it a profit centre?

Answer 18

A centre where a manager has responsibility over costs and revenue

e.g retail store electrical goods

Question 19

What is an investment centre?

Answer 19

Where a manager is responsible for costs and profits but also capital expenditure

e.g purchasing assets or subsidiaries

Question 20

What is a sunk cost?

Answer 20

One which has already been incurred and is irrecoverable

Question 21

What is a variable cost?

Answer 21

Variable costs rise or fall with how much the company produces

Question 22

What is the prime cost?

Answer 22

Sum of:
Direct material cost
Direct labour cost
Direct expenses

Question 23

What is an opportunity cost?

Answer 23

is the profit lost by taking the next best alternative use for the resource, when an alternative option is selected

Question 24

What is contribution?

Answer 24

Sales - variable costs

Question 25

What are the assumptions built into CVP analysis?

Answer 25

1) Variable cost per unit is constant and total variable costs increase and decrease with sales volume
2) Fixed costs will never change
3) The selling price is constant no matter how many units sold

Question 26

The Variance analysis process follows these steps:

Answer 26

1) Set standard costs
2) Create a budget based on planned output
3) Prepare a flexed budget using standard costs and actual units sold
4) Calculate the actual results for the period
5) Determine variances based on actual and expected results