P1.B.4 Budget Methodologies

Question 1

Annual / Master Budget

P1.B.4 Budget Methodologies

Answer 1

1. Static budget: operational & financial plans
2. Suitable for all
3. Prepared annually

Advantages
1. Widely used & easy to prepare

Disadvantages

1. Designed for a single level of activity
2. Actual results may differ

Question 2

Project Budgets

P1.B.4 Budget Methodologies

Answer 2

1. Used for specific projects
2. Short or long term, depends on length of project

Advantages
1. Focused on specific projects

Disadvantages
1. May affect other department services that are provided to entity as its too focused on project

Question 3

Activity Based Budgeting

P1.B.4 Budget Methodologies

Answer 3

1. Designed to classify costs based on activity, not dept. or products
2. Used by companies that require a number of products, activities
3. Prepared for a year or less

Advantages
1. Accurate way to project costs, promote continuous improvement

Disadvantages
1. Not practical if costs exceed benefits

Question 4

Zero Base Budgeting

P1.B.4 Budget Methodologies

Answer 4

1. Used by companies employing significant change or continuous improvement
2. Used when prior period results can’t be relied upon
3. Prepared for any timeframe

Advantages
1. Encourages total review of budget elements

Disadvantages
1. Costly to review every component

Question 5

Continuous (Rolling) Budget

P1.B.4 Budget Methodologies

Answer 5

1. Adds new period to budget after current one ends
2. Used when there’s constant change in products
3. Used for 1 yr & continuously updated

Advantages
1. Spreads costs & information is relevant

Disadvantages
1. Overemphasizes financial aspect & overlooks operational issues

Question 6

Flexible Budgeting

P1.B.4 Budget Methodologies

Answer 6

1. Adaptable to varying levels of actual activity
2. Used when activity levels change or is expected to change or static budget not feasible
3. Used for 1 year or less

Advantages
1. Relevant to varying levels of production

Disadvantages
1. Relies heavily on fixed & variable costs. If costs are inaccurate, estimates are too

Question 7

Budget Components

P1.B.4 Budget Methodologies

Answer 7

1. Operating budget: how resources of the company will be used
2. Financial budget: how resources (action) will be funded