Static and Flexible Budgets (Session 8)

Question 1

What is a budget?

Answer 1

• The formalized financial plan for operations of an organization for a
  specified future period
• Organization’s financial roadmap
• Reflects management’s forecast of the financial effects of an organization’s plans for one or more future time periods.

Question 2

Budgets and Levers of Control

Answer 2

• Belief systems
• Boundary systems
• Interactive control systems
• Diagnostic control systems

Question 3

Belief systems

Answer 3

• Communicate organizational strategies and goals for
  the entire organization as well as for each segment,
  division, or department
• Motivate managers to plan in advance and to
  coordinate operating activities

Question 4

Boundary Systems

Answer 4

• Authorize employees to engage in only planned
  business activities and to spend within budget
  limits
• Ensure sufficient cash to maintain financial
  viability

Question 5

Interactive Control Systems

Answer 5

• Engage in organizational learning by investigating the
  strategic opportunities and threats revealed by
  differences between planned and actual
  performance
• Re-evaluate and revise strategics and operating plans
  as conditions change

Question 6

Diagnostic Control Systems

Answer 6

• Motivate managers to provide appropriate
  estimates, meet expectations, and use resources
  efficiently
• Monitor expected versus actual performance to
  maintain control over preset goals
• Assign responsibility and reward employees for
  achieving budget targets

Question 7

What is a master budget?

Answer 7

• A comprehensive plan for the upcoming accounting period.
• Usually prepared for a one-year period.
• Based on a series of budget assumptions.

Question 8

Sales Forecasting

Answer 8

• Project past sales trends into the future using judgment or statistical methods.
• Estimate sales based on industry data for similar businesses.
• Construct a financial model to predict sales based on one or more forecasted economic variables.
• Gather sales predictions from sales and other personnel.
• Conduct market research to estimate customer demand.

Question 9

Cost Forecasting

Answer 9

• Budget individual costs as a %of revenues or as a percentage change from the prior year.
• Managers can improve cost forecasts by carefully evaluating cost behaviour

Question 10

Cash Flow Forecasting

Answer 10

• Includes not only identifying the expected sources and uses of cash but also estimating the
  timing of receipts and disbursements.

Question 11

Cash Budgets

Answer 11

Cash budgets reflect the effects of management’s plans on cash and
summarize information that accountants gather about the expected amounts
and timing of cash receipts and disbursements.

Question 12

Cash receipts

Answer 12

Operating cash receipts are estimated from budgeted revenues, taking into
account the nature of customer transactions.

Question 13

Cash disbursements

Answer 13

Operating cash disbursements are estimated from the budgets for direct
materials, direct labour , manufacturing overhead, and support

Question 14

Flexible Budgets

Answer 14

A flexible budget is a set of revenue and cost relationships that can be
used to estimate costs and cash flows for any level of operations, within
the relevant range.

Question 15

Benefit of a flexible budget?

Answer 15

managers and
accountants can easily perform sensitivity analysis to estimate the
effects of deviations from budget assumptions.

Question 16

Static Budgets

Answer 16

A static budget is a budget based on forecasts (point estimates) of
specific volumes of production or services. All variable revenues and
costs are calculated for a specific volume of operations.

Question 17

Three possible reasons for budget variances

Answer 17

• Inefficiencies in actual operations that can be corrected.
• Efficiencies in actual operations that can be replicated in other areas of the
  organization.
• Uncontrollable outside factors that require changes to the budgeting process.

Question 18

Participative Budgeting

Answer 18

Participative budgeting occurs when managers who are responsible for
meeting budgets also prepare the initial budget forecasts, setting targets for
themselves.

Question 19

Budgetary Slack

Answer 19

When employees set targets, incentives exist to set them low so that goals can be met
easily, a practice known as budgetary slack.

Question 20

Budget ratcheting

Answer 20

When top management sets targets, incentives exist to raise targets to induce greater
productivity a practice known as budget ratcheting.

Question 21

Zero-based budgeting

Answer 21

Zero-based budgeting, is where managers justify budget amounts as if no
information about budgets or costs from prior budget cycles were available.

Question 22

Rolling budget

Answer 22

A rolling budget, which is prepared monthly or quarterly, reflects planning changes
going forward, often through the next 12 to 16 months.

Question 23

Activity-based budgeting

Answer 23

Activity based budgeting uses activity cost pools and their related cost drivers to
anticipate the costs for individual activities.

Question 24

Kaizen budgets

Answer 24

Kaizen budgets set targeted cost reductions across time, anticipating market price
reductions across the life of a product.

Question 25

Beyond Budgeting

Answer 25

Beyond budgeting argues that managers’ or employees’ performance should be
evaluated relative to internal or external benchmarks.