Profit Planning and Budgeting

Question 1

What is a budget?

Answer 1

It is a detailed plan for the acquisition and use of financial and other resources over a specified time period

Question 2

What is planning?

Answer 2

It involves developing objectives and preparing various budgets to achieve these objectives

Question 3

What is control?

Answer 3

It involves the steps taken by management that attempt to ensure the objectives are attained

Question 4

What are the advantages of budgeting?

Answer 4

They define goals and objectives, communicating plans, think about and plan for the future, coordinate activities and uncover potential bottlenecks

Question 5

How do we choose a budget period?

Answer 5

It is usually a twelve-month budget that rolls forward one month as the current month is completed

Question 6

What are the advantages of participative budgeting?

Answer 6

Individuals at all levels of the organisation are recognised as members of the team whose views and judgments are valued and people are more likely to work at fulfilling a budget that they have participated in setting

Question 7

What is a master budget?

Answer 7

It represents a comprehensive expression of managements plans for the future and how these plans are to be accomplished

Question 8

What is the master budget composed of?

Answer 8

A number of smaller, specific budgets encompassing sales, production, raw materials, direct labour, manufacturing OH, selling and administrative expenses and inventories

Question 9

What is a sales budget?

Answer 9

It is the starting point in preparing the master budget, a detailed schedule showing expected sales for the coming periods expressed in units and pounds

Question 10

What is a direct materials budget?

Answer 10

It details the raw materials that must be purchased to fulfill the production budget and to provide for adequate stocks

Question 11

What is a direct labour budget?

Answer 11

It is developed from the production budget, direct labour requirements must be computed so that the company will know whether sufficient labour time is available to meet production needs

Question 12

What is a manufacturing overhead budget?

Answer 12

It provides a schedule of all costs of production other than direct materials and direct labour`

Question 13

What is an ending finished goods stock budget?

Answer 13

It determines cost of goods sold on the budgeted profit statement and also to determine the amount to put on the balance sheet stock account for unsold units

Question 14

What is a selling and administrative expense budget?

Answer 14

It lists the budgeted expenses for areas other than manufacturing

Question 15

What is a cash budget?

Answer 15

It is a detailed plan showing how cash resources will be acquired and used over some specified time period

Question 16

What is the principal purpose of a cash budget?

Answer 16

To provide information on probable cash needs during the budget period, so that required bank loans and other sources of financing can be anticipated and arranged well in advance of the actual time of needs

Question 17

What is a cash budget composed of?

Answer 17

The receipts, disbursements, cash excess or deficiency and financing section

Question 18

What is a budgeted profit and loss account?

Answer 18

It shows the company’s planned profit for the upcoming budget period and it stands as a benchmark against which subsequent company performance can be measured

Question 19

What are some criticisms of budgeting?

Answer 19

Future plans are too heavily based on marginal changes to past financial results and statements and the negative impact on organisational flexibility, creativity and information sharing that are associated with a non-participatory style of budgeting