Session 7 - Aspects of budgeting

Question 1

What is a budget?

Answer 1

A budget is a financial plan for a business that is prepared in advance.

Question 2

How can a budget help monitor and control a business

Answer 2

A business can compare with actual perfromance to identify variances. Variances are investigated by management and actions are taken to rectify any performance issues.

Question 3

What is a fixed budget?

Answer 3

Set at the beginning of a period and then adhered to and monitored. A fixed budget remains the same whetever the level of activity. Useful where circumstances are stable.

Question 4

What is a flexible budget?

Answer 4

Changes with the level of activity and takes into account different cost behaviour patterns

Question 5

How do you identify the amount of fixed and variable costs in a semi varibale cost?

Answer 5

Use high-low method

Question 6

What are favourable variances?

Answer 6

Favourable variances are where actual costs are lower than budgeted costs or when actual revnues are higher than budgeted

Question 7

What are adverse variances?

Answer 7

actual costs are hgiher than budgeted
budgeted revenue is higher than actual revenue

Question 8

How are variances reported?

Answer 8

Summarised on a budget report

Question 9

How to work out variance percentages?

Answer 9

variance divided by budget x 100

Question 10

What is a revenue budget?

Answer 10

2 parts one will include forecasting how many sales the business will make and the 2nd part will be multiplying the estimated sales figure by estimated selling price per unit to give the sales revenue budget

Question 11

How do variances occur?

Answer 11

Inflation so costs increase
Changes to specification and quality of materials
changes in work practise.

Question 12

What is a rolling budget?

Answer 12

Budget is continually kept up to date by adding a nerw budget once the most recent budget period is completed.

Question 13

What are the advantages of a rolling budget?

Answer 13

Always a budget that extends into the future
management can reassess the budget after each period
focus is on one budget rather an the whole year

Question 14

What are the disadvantages of a rolling budget?

Answer 14

Can be costly and time consuming to keep revisiting the planning process to add a new budget
Focus of the business may be more concerned with updated the rolling budget rather than controlling actual costs and revenues.

Question 15

Name a cause of a favourable and adverse variance for materials?

Answer 15

Favourable - Greater care in purchasing
Adverse - Price increase

Question 16

Name a cause of a favourable and adverse variance for Labour?

Answer 16

Favourable - Lower the rate you pay workers
Adverse - minimum wage increases

Question 17

Name a cause of a favourable and adverse variance for fixed/variable overheads?

Answer 17

Favourable - More economical use of services
Adverse - Increased cost of services

Question 18

What is meant by interdependence of variances?

Answer 18

If a lower quality material is purchased this will be a favourable adverse for material costs however due to this this may create an adverse variance as there is a greater wastage.