Preparing Budgets

Question 1

Name 5 pruposes of a budget?

Answer 1

Planning - Helps decide what needs to be done to help the business produce its reuquired output.

Communicates and coordinates - All relevant personel will anticipate problems and any areas of confusion clarified. Goal congruence.

Authorise - Once the budget is agreed it can become the authority to follow a course of action or spend

Monitor and control - management can use a budget to monitor actual results against the budget.

Motivate - Budget may be linked to rewards where taregts are met or exceeded.

Question 2

Name the 4 stages of the budget cycle?

Answer 2

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.

Question 3

Name 4 types of budget?

Answer 3

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.

Question 4

What internal infromation can be gathered to help set a budget?

Answer 4

Financial accounts, payroll, accounting system

Question 5

What external infromation can be gathered to help set a budget?

Answer 5

Competitiors, suppliers and economic information

Question 6

Name some possible limiting factors?

Answer 6

Capacity of premises
Availability of raw materials
Amount of working capital
Availability of skilled workers

Question 7

What is meant by the phrase key budget factor?

Answer 7

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.

Question 8

What is the budget manual?

Answer 8

Includes instructions governing the responsibility of individuals, setting out the procedures relating to the preparation of budget

Question 9

What will the budget manual include?

Answer 9

Types of budget that are being produced
Format used for budgets
Primary use of budgets

Question 10

What is the budget committee?

Answer 10

Group of managers and employees drawn from a range of departments with the responsibility of setting a budget

Question 11

What are the budget comittee responsible for?

Answer 11

Agreeing policies in relation to budgets
Co-ordinating budgets
Suggesting ammendments budgets
Monitoring the budget once in place.

Question 12

What is the role of a budget accountant?

Answer 12

Preparing budgets, monitoring budgets against actual performance and reporting variances.

Usually responsibilities are listed in the budget manual

Question 13

What is a strategic budget?

Answer 13

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.

Question 14

What is an operational budget?

Answer 14

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.

Question 15

What is a capital expenditure budget’s purpose?

Answer 15

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.

Question 16

What is the role of management to ensure effective budgeting?

Answer 16

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.

Question 17

What is participative budgeting? (bottom-up)

Answer 17

Staff with specialised knowledge are consulted throughout the budegting process.

Question 18

Advantages of participative budgeting?

Answer 18

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

Question 19

What is pseudo-participation?

Answer 19

Where participative budgeting is used however views of staff are ignored and the advantages will turn into disadvantages.

Question 20

What is meant by budgetary slack?

Answer 20

Where managers prepare a budget but under estimate income or over estimate costs.

Question 21

Advantages of a top-down approach?

Answer 21

Decisions are made quicker
Managers able to respond quickly to changing circumstances

Question 22

Disadvantages of top-down approach?

Answer 22

Some employees may feel it is not part of their job and therefore if asked to help see it as added pressure.
May feel as though they are not adquately trained to make a positive contribution.

Question 23

What is responsibility accounting?

Answer 23

Managers are responsbile for an area of the organisation. Three responsibility areas include: Cost centre, profit centre and investment centre.

Question 24

Whats the theory behind controllable and uncontrollable costs?

Answer 24

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.

Question 25

How to measure performance of controllability of costs?

Answer 25

Controllable costs in a cost centre
Controllable profit in a profit centre
Return on capital employed in an investment centre

Question 26

Name 5 budget approaches?

Answer 26

Zero based budgeting
Priority based budgeting
Rolling budgets
Activity based budgeting
Incremental budgeting

Question 27

What is Zero based budgeting?

Answer 27

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

Question 28

What is priority based budgeting?

Answer 28

Ignores previous budget, examines the desired outcome and prioritise allocating resources in order to achieve these objectives.

Question 29

What is activity based budgeting?

Answer 29

Used to manage indirect costs within production, allocation of resources based on how activites use resources.

Used in conjuction with ABC costing

Question 30

What is a rolling budget?

Answer 30

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.

Question 31

What is an incremental budget?

Answer 31

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 developming new ideas or reducing costs. Managers may feel they need to spend all their budget to avoid it being taken away.

Question 32

What is a contingency budget?

Answer 32

A budget which is designed to allow for unexpected future events and their impact.

Question 33

What is the budget cycle?

Answer 33

Plan, Implement, Monitor and Control and motivate.

Question 34

Walkthrough the initial budget process (6 steps)

Answer 34

Rview 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

Question 35

How to create a sales budget?

Answer 35

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?

Question 36

How to work out the production budget?

Answer 36

Budgeted sales - Opening inventory + closing inventory

Question 37

How to work out the materials purchases budget?

Answer 37

Quantitiy of materials used - Opening inventory of raw materials + closing inventory of raw materials

Question 38

Why is it important to create a materials purchased budget?

Answer 38

So the organisation know when payments will need to be made feeding into the cash budget.

Question 39

Why are cash budgets being prepared?

Answer 39

So cash blanaces can be anticipated and plans cn be made for short-term borrowing if necessary.