Preparing Budgets Flashcards
Purposes of a budget?
Planning - Helps decide what needs to be done to help the business produce its required output.
Implement
Monitor
Motivate and Control
Name the 4 stages of the budget cycle?
Budget preparation - bringing together lots of data required, all relevant people involved.
Budget approval - Large organisation this will be a formal procedure, small business may be an agreement between relevant managers.
Budget implementation - Budget is active from start of period, all relevant procedures will be adhered to.
Monitoring and evaluation of budget - Concerned with actual performance, results reported and acted upon. Could lead to revision of current or future budgets.
Name 4 types of budget?
Operating budget - short to medium term, deals with immediate requirements of the business.
Capital budget - Acquisiton of non-current assets which are required to support the business, ‘one off transactions’.
Fixed budget - Appropriate if output level can be forecasted, can be used for planning in conjunction with a flexed budget.
Flexed budget - Actual output is the foundation of this budget, used by flexing the budgeted costs in the original fixed budget to reflect actual output.
What internal infromation can be gathered to help set a budget?
Financial accounts, payroll, accounting system
What external infromation can be gathered to help set a budget?
Competitiors, suppliers and economic information
Name some possible limiting factors?
Capacity of premises
Availability of raw materials
Amount of working capital
Availability of skilled workers
What is meant by the phrase key budget factor?
This is the factor which all aspects of the operation depend on, for most companies it is sales. However it could be lack of skilled labour if there isn’t enough labour to produce the required output level.
What is the budget manual?
Includes the responsibility of individuals and sets out the procedures relating to the preparation of budget
What will the budget manual include?
Primary purposes of a budget
Types of budgets being used
Responsibility for setting budgets
Responsibility for monitoring performance
What is the budget committee?
Group of managers and employees drawn from a range of departments with the responsibility of setting a budget
What are the budget comittee responsible for?
Agreeing policies in relation to budgets
Co-ordinating budgets
Suggesting ammendments budgets
Monitoring the budget once in place.
What is the role of a budget accountant?
Preparing budgets, monitoring budgets against actual performance and reporting variances.
Usually responsibilities are listed in the budget manual
What is a strategic budget?
Produced well in advance, concerned with long-term strategy. Not set out in great detail as they are just outlining information. Responsibility of senior management.
What is an operational budget?
Produced for shorter periods of time (12 months), may developed from the original strategic budget for the period whilst taking into account facts and figures about the immediate future.
Responsibility of middle managers that control operations.
What is a capital expenditure budget’s purpose?
To esnure that any acquisition is acquired at the most cost-effective price for the organisation, planned production which relies on capital expenditure is incorperated.
What is the role of management to ensure effective budgeting?
Managers are responsible for the development of the budget for their area by providing apparopraite information to back this up.
Once the budget is implemented it is managers responsibility to monitor and control the performance.
What is participative budgeting? (bottom-up)
Staff with specialised knowledge are consulted throughout the budegting process.
Advantages of participative budgeting?
Takes into account of information from those with specialised knowledge
Those involved have improved awareness of organisational goals
Those involved accept budget and motivated to work towards it
What is pseudo-participation?
Where participative budgeting is used however views of staff are ignored and the advantages will turn into disadvantages.
What is meant by budgetary slack?
Where managers prepare a budget but under estimate income or over estimate costs.
Advantages of a top-down approach?
Decisions are made quicker
Managers able to respond quickly to changing circumstances
Disadvantages of top-down approach?
Some employees may feel added pressure to meet the goal if it is considered unachieveable
No collaborative working on the same budget, impsoed on employees
What is responsibility accounting?
Managers are responsbile for an area of the organisation. Three responsibility areas include: Cost centre, profit centre and investment centre.
Whats the theory behind controllable and uncontrollable costs?
Depends on the manager, factors like intrest rates, inflation are uncontrollable however how much to borrow affected by intrest rates is controllable down to the manager.
How to measure performance of controllability of costs?
Controllable costs in a cost centre
Controllable profit in a profit centre
Return on capital employed in an investment centre
Name 5 budget approaches?
Zero based budgeting
Priority based budgeting
Rolling budgets
Activity based budgeting
Incremental budgeting
What is Zero based budgeting?
Each period starts from zero regardless of last periods budget. Each cost which is agreed needs to be justified based on the benefit from the spending amount.
Ad: forces re-evaluation of activites and how they contribute to the organisations obj
avoids wastage and budgetary slack
Dis: time consuming, subjective decision
What is priority based budgeting?
Ignores previous budget, examines the desired outcome and prioritise allocating resources in order to achieve these objectives.
What is activity based budgeting?
Used to manage indirect costs within production, allocation of resources based on how activites use resources.
Used in conjuction with ABC costing
What is a rolling budget?
A budget which is continually extended into the future as time goes on. Allows managers to adjust to changing conditions. Extended by one month at a time.
What is an incremental budget?
Where a budget is prepared based on the previous periods budget. Produces a series of budgets that change over time gradually. This provides consistancy and security for departments.
No incentives for developing new ideas or reducing costs. Managers may feel they need to spend all their budget to avoid it being taken away.
What is a contingency budget?
A budget which is designed to allow for unexpected future events and their impact.
What is the budget cycle?
Plan, Implement, Monitor and Control and motivate.
Walkthrough the initial budget process (6 steps)
Review the objectives
Review the strategy to achieve the obj
Identify companies current limiting factors
Identify the key budget factor
Forecast the level of this key factor
Build the budgets around this factor
How to create a sales budget?
Forecast of sales units.
Level of production depends on:amount of finished goods which the business plans to hold read to sell (inventory)
Finished goods may be rejetced, quality issues?
How to work out the production budget?
Budgeted sales - Opening inventory + closing inventory
How to work out the materials purchases budget?
Quantitiy of materials used - Opening inventory of raw materials + closing inventory of raw materials
Why is it important to create a materials purchased budget?
So the organisation know when payments will need to be made feeding into the cash budget.
Why are cash budgets being prepared?
So cash blanaces can be anticipated and plans can be made for short-term borrowing if necessary.
How to work out a stepped cost?
stepped cost increases every 10,000 units example
original budget / 10,000 = how many steps there has been if its not a whole number round up
