The budgeting process Flashcards
What is a budget?
A tool that managers use to plan and control the use of resources and showcases the company’s objectives and how management intends to acquire and use resource to attain those objectives
What does the planned operating budget help?
To plan future earnings and results in a projected managerial income statement
What does the financial budget helps management plan?
The financing of assets and results in a projected balance sheet
What does budgeting process involves?
The planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future
True or False
Companies can use budget to actual comparisons to evaluate individual performance
True
Disclose the steps of the strategic planning, budgeting and control process
- Strategic planning process (specification of objectives and strategies)
- Creation of long-term plan to plan to implement strategies
- Preparation of the annual budget within the context of long-term plan
- Monitor actual results
- Respond to deviations from plan
What is strategic plan?
When a organization prepares a long term plan
Where does the strategic plan begin?
With the specification of an organization’s vision, mission and objectives towards which future operations should be directed
Define vision statements
It clarifies the beliefs and governing principles of an organization: what it wants to be in the future or how it wants the world in which it operates to be
Define mission statements
Is more action oriented. It includes a description in very general terms of what the organization does to achieve its vision, its board purpose and reason for existence, the nature of the business it is in and the customers it seeks to serve and satisfy
State the stages in the budgeting process
- Communicating details of budget policy and guidelines to those people responsible for the preparation of budgets
- Determining the factor that restricts output
- Preparation of the sales budget
- Initial preparation of various budgets
- Negotiation of budgets with superior
- Coordination and review of budgets
- Final acceptance of budgets
- Ongoing review of budgets
What does the sales budget show?
The quantities of each product that the company plans to sell and the intended selling price
What does the sale budget provide?
The predictions of total revenue from which cash receipts from customers will be estimated and it also supplies the basic data for constructing budgets for production costs, selling, distribution and administrative expenses
True or False
Sales budget is the foundation of all other budgets, since all expenditure is ultimately dependent on the volume of sales
True
What is the next stage after the sales budget?
The production budget and budgeted inventory levels
How is the production budget expressed?
In quantities
Who is responsible for the production budget?
The production manager
What is the objective of the production budget?
To ensure that production is sufficient to meet sales demand and that economic inventory levels are maintained
Who are responsible for preparing the direct material usage budget?
The supervisors of the departments will prepare the estimates of the materials that are required to meet the production budget
Which personnel is responsible for the direct materials purchase budget?
The purchasing manager, for obtaining the planned quantities of raw materials to meet the production requirements
What is the objective of the direct material budget?
To purchase these materials at the right time at the planned purchase price, also take into account the planned raw material inventory levels
Who will prepare the direct labour budget?
The respective managers of departments, they will prepare estimates of their departments’ labour hours required to meet the planned production
How is the labour budget rate per hour determined?
By the industrial relations department
True or false
The production overhead budget is also the responsibility of the accounts manager
False
The production overhead budget is also the responsibility of the respective production** department managers**
What does the total of the production overhead budget will depend on?
The behaviour of the costs of the individual overhead items in relation to the anticipated level of production
How should the production overhead budget be analysed?
According to whether the overheads are controllable or non-controllable for the purpose of cost control
True or False
For cost control, the direct labor budge, material usage budget and production overhead budgets combined into separate departmental budgets are known as responsibility centres.
True
How are departmental budgets normally broken down?
Into 12 separate monthly budgets and the actual monthly expenditure is compared with the budgeted amounts for each of the items concerned
Why is there a comparison between actual monthly expenditure to budgeted?
To judge how effective managers are in controlling the expenditure for which they are responsible
State the objective of cash budgets
To ensure that sufficient cash is available at all times to meet the level of operations that are outlined in the various budgets
True or False
Cash budgets are subject to uncertainty, it is necessary to provide for more than the minimum amounts required, to allow for some margin of error in planning
True
True or False
Cash budgets can help a company ensure that there is an cash balances surplus
False
Cash budgets can help a company avoid cash balances surplus by enabling management to steps in advance to invest the surplus cash in short term investments
Can cash deficiencies be identified in advance in a cash budget?
Yes, and steps can be taken to ensure that bank loans will be available to meet any temporary shortfalls
What is the overall aim of cash budgets?
To manage the cash of the company to attain maximum cash availability and maximum interest income on any idle funds
State the aim of activity based budgeting (ABB)
To authorize the supply of only those resources that are needed to perform activities required to meet he budgeted production and sales volume
State the stages activity based budgeting follows
- Estimate the production and sales volume by individual products or customers
- Estimate the demand for organizational activities, especially indirect cost and support activities
- Determine the resources that are required to perform organizational activities
- Estimate for each resource the quantity that must be supplied to meet the demand
- Take action to adjust the capacity of resources match the projected supply
What does activity based budgeting estimates and determines?
- Estimate the production and sales volume by individual products or customers
- Estimate the demand for organisational activities.
- Determine the resources that are required to perform organisational activities.
- Estimate for each resource the quantity that must be supplied to meet the demand.
What does zero based budgeting requires?
That projected expenditure for existing activities should start from base zero rather than last year’s budget
What does zero based budgeting do?
Focusses on programmes or activities instead of functional
departments based on line items, which is a feature of traditional budgeting.
What is zero based budgeting best suited for?
Discretionary costs and support activities
State the 3 stages of zero based budgeting?
- A description of each organisational activity in a decision package.
- The evaluation and ranking of decision packages in order of priority.
- Allocation of resources based on order of priority up to the spending cut-off level.
Disclose the benefit of zero based budgeting over traditional methods of budgeting
- Traditional budgeting tends to extrapolate the past by adding a percentage increase to the current year. Zero-Based budgeting avoids the deficiencies of incremental budgeting and represents a move towards allocating resources by need or benefit.
- Zero-based budgeting creates a questioning attitude rather than one that assumes that current practice represents value for money.
- Zero-Based budgeting focuses attention on outputs in relation to value for money.’
What are the criticisms of budgeting?
- Encouraging rigid planning and incremental thinking.
- Overly time consuming
- Ignoring key drivers of shareholder value
- Rigid yearly ritual that impedes firms from being flexible.
- Tying the company to a 12-month commitment.
- Meeting only the lowest targets and not attempting to beat the targets.
- Spending what is in the budget even if this is not necessary.
- Being disconnected from strategy.
