Prodution Budgeting Theory Flashcards
Why is budgetary control necessary (why prepare a flexible budget?)
- to compare actual results with the budget
- To identify any variances
- take corrective action to ensure all targets and objectives are achieved
Advantages of preparing a budget?
- a plan of performance is drawn up
- staff are motivated as they have targets to achieve
- resources are used as efficiently as possible
- comparisons can be made between actual figures and budgeted figures
What is the principal budget factor?
A factor that restricts activity or limits output and so prevents the company from expanding indefinitely
What is the main principal budget factor? What are some other factors?
The main factor is sales demand. Some other examples are the supply of materials, the availability of Labour, the capacity of the plant and the availability of the capital .
What is a sales budget?
It shows the quantities and the sales value of each product the company intends to sell. The expected sales will be based on figures provided by the previous years’ sales, the market research, the opinion of the sales manager and so on. Other sources include trends/ the state of the economy, competition, the price of the good and the consideration of whether the good is a luxury or necessity.
What is a production budget?
Decides quantity of finished goods that must be produced to meet expected demand plus/minus the budgeted increase/decrease in closing stock levels of finished goods.
What is a direct materials usage budget?
Prepared when the quantities of required materials are known. Prepared by production manager and is expressed in quantities only.
What is a materials purchases budget?
Prepared when quantities of required materials are known. Prepared by purchasing manager and expressed in both quantities and value
What is direct labour budget?
Used to establish the number of direct labour hours and the related direct labour wage costs. Prepared by production manager and expressed in both hours and value (cost)
What is the factory overhead budget?
Takes into account indirect materials, indirect labour and indirect expenses. It is expressed in both quantity and value.
What is the administration budget?
Deals with all administration expenses involved in the running of the business. Expressed in financial terms and is the sum of all administration expenses.
What is the selling and distributing budget?
Deals with the costs that are likely to be incurred in the selling and distribution of the budgeted sales to customers.
What is a capital budget?
Deals with any planned capital expenditure. Decisions relating to those items would be the responsibility of the board of directors. It is the responsibility of the financial controller.
What is the master budget?
When all budgets are ready, this budget is prepared. It provides an overview of the planned operations of the company. It consists of: a budgeted profit and loss account, a budgeted balance sheet, and in the case of a manufacturing business it will include a budgeted manufacturing account and a budgeted trading account.
What are the differences between financial and management accounting?
Management accounting plans for the future, financial accounting records past events
Management accounting has an internal focus and provides information to aid planning and decision making, financial accounting is internal and external focus and provides information to stakeholders.
Management accounting prepares reports as often as managers request them, financial accounting prepares reports once a year.
Management accounting is not governed or restricted by legislation and legal requirements, financial accounting is governed and regulated by both legislation and accounting standards.
Three reasons for product costing
It allows the business to set a price that will make a profit
If you know what makes up the product cost, you can look for ways to reduce it and make more profit or reduce the price and sell more
If you know what it costs to make a product, then you can decide to make it or not.
