P1.B.2 Budgeting Concepts

Question 1

What are the steps of the Budget Cycle?

P1.B.2 Budgeting Concepts

Answer 1

1. Master budget
2. Performance evaluation
3. Variance analysis
4. Corrective action
5. Revisions, if necessary

Question 2

Characteristics of a Successful Budget

P1.B.2 Budgeting Concepts

Answer 2

1. Linked to company’s strategy
2. Supported by management
3. Sense of ownership by all levels of management
4. Foster motivation among employees
5. Represent unbiased estimate
6. Flexible
7. Properly communicated

Question 3

Ideal (Theoretical) Standards

P1.B.2 Budgeting Concepts

Answer 3

1. Maximum efficiency
2. Tight standards
3. No allowances

Question 4

Currently Attainable (Practical) Standards

P1.B.2 Budgeting Concepts

Answer 4

1. Challenging but attainable
2. Integrated with a company’s cost system
3. Allowances permitted
4. Discourages continued improvement

Question 5

Authoritative Standards

P1.B.2 Budgeting Concepts

Answer 5

1. Top down approach
2. Reduces time required to create budget
3. Buy in may be difficult

Question 6

Participative Standards

P1.B.2 Budgeting Concepts

Answer 6

1. Motivating to management
2. Higher accuracy
3. Downside: budget slack

Question 7

Budget Slack

P1.B.2 Budgeting Concepts

Answer 7

1. Underestimate revenues
2. Overestimate expenses
3. Resource allocation inefficiencies
4. Buffer against unpredictable economic changes

Question 8

Standards for Direct Material & Direct Labor

P1.B.2 Budgeting Concepts

Answer 8

Direct Material

1. Quality
2. Quantity
3. Price

Direct Labor

1. Skills, processes, operating conditions
2. Quantity standard determined by labor hours
3. Fixed by personnel departments and affected by labor market, laws and contracts.

Question 9

Standard & Budgeted Costs

P1.B.2 Budgeting Concepts

Answer 9

Standard: stated as unit costs

Budgeted: presented as total costs