The budgeting process

Question 1

What is a budget?

Answer 1

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

Question 2

What does the planned operating budget help?

Answer 2

To plan future earnings and results in a projected managerial income statement

Question 3

What does the financial budget helps management plan?

Answer 3

The financing of assets and results in a projected balance sheet

Question 4

What does budgeting process involves?

Answer 4

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

Question 5

True or False

Companies can use budget to actual comparisons to evaluate individual performance

Answer 5

True

Question 6

Disclose the steps of the strategic planning, budgeting and control process

Answer 6

1. Strategic planning process (specification of objectives and strategies)
2. Creation of long-term plan to plan to implement strategies
3. Preparation of the annual budget within the context of long-term plan
4. Monitor actual results
5. Respond to deviations from plan

Question 7

What is strategic plan?

Answer 7

When a organization prepares a long term plan

Question 8

Where does the strategic plan begin?

Answer 8

With the specification of an organization’s vision, mission and objectives towards which future operations should be directed

Question 9

Define vision statements

Answer 9

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

Question 10

Define mission statements

Answer 10

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

Question 11

State the stages in the budgeting process

Answer 11

1. Communicating details of budget policy and guidelines to those people responsible for the preparation of budgets
2. Determining the factor that restricts output
3. Preparation of the sales budget
4. Initial preparation of various budgets
5. Negotiation of budgets with superior
6. Coordination and review of budgets
7. Final acceptance of budgets
8. Ongoing review of budgets

Question 12

What does the sales budget show?

Answer 12

The quantities of each product that the company plans to sell and the intended selling price

Question 13

What does the sale budget provide?

Answer 13

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

Question 14

True or False

Sales budget is the foundation of all other budgets, since all expenditure is ultimately dependent on the volume of sales

Answer 14

True

Question 15

What is the next stage after the sales budget?

Answer 15

The production budget and budgeted inventory levels

Question 16

How is the production budget expressed?

Answer 16

In quantities

Question 17

Who is responsible for the production budget?

Answer 17

The production manager

Question 18

What is the objective of the production budget?

Answer 18

To ensure that production is sufficient to meet sales demand and that economic inventory levels are maintained

Question 19

Who are responsible for preparing the direct material usage budget?

Answer 19

The supervisors of the departments will prepare the estimates of the materials that are required to meet the production budget

Question 20

Which personnel is responsible for the direct materials purchase budget?

Answer 20

The purchasing manager, for obtaining the planned quantities of raw materials to meet the production requirements

Question 21

What is the objective of the direct material budget?

Answer 21

To purchase these materials at the right time at the planned purchase price, also take into account the planned raw material inventory levels

Question 22

Who will prepare the direct labour budget?

Answer 22

The respective managers of departments, they will prepare estimates of their departments’ labour hours required to meet the planned production

Question 23

How is the labour budget rate per hour determined?

Answer 23

By the industrial relations department

Question 24

True or false

The production overhead budget is also the responsibility of the accounts manager

Answer 24

False

The production overhead budget is also the responsibility of the respective production** department managers**

Question 25

What does the total of the production overhead budget will depend on?

Answer 25

The behaviour of the costs of the individual overhead items in relation to the anticipated level of production

Question 26

How should the production overhead budget be analysed?

Answer 26

According to whether the overheads are controllable or non-controllable for the purpose of cost control

Question 27

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.

Answer 27

True

Question 28

How are departmental budgets normally broken down?

Answer 28

Into 12 separate monthly budgets and the actual monthly expenditure is compared with the budgeted amounts for each of the items concerned

Question 29

Why is there a comparison between actual monthly expenditure to budgeted?

Answer 29

To judge how effective managers are in controlling the expenditure for which they are responsible

Question 30

State the objective of cash budgets

Answer 30

To ensure that sufficient cash is available at all times to meet the level of operations that are outlined in the various budgets

Question 31

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

Answer 31

True

Question 32

True or False

Cash budgets can help a company ensure that there is an cash balances surplus

Answer 32

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

Question 33

Can cash deficiencies be identified in advance in a cash budget?

Answer 33

Yes, and steps can be taken to ensure that bank loans will be available to meet any temporary shortfalls

Question 34

What is the overall aim of cash budgets?

Answer 34

To manage the cash of the company to attain maximum cash availability and maximum interest income on any idle funds

Question 35

State the aim of activity based budgeting (ABB)

Answer 35

To authorize the supply of only those resources that are needed to perform activities required to meet he budgeted production and sales volume

Question 36

State the stages activity based budgeting follows

Answer 36

1. Estimate the production and sales volume by individual products or customers
2. Estimate the demand for organizational activities, especially indirect cost and support activities
3. Determine the resources that are required to perform organizational activities
4. Estimate for each resource the quantity that must be supplied to meet the demand
5. Take action to adjust the capacity of resources match the projected supply

Question 37

What does activity based budgeting estimates and determines?

Answer 37

• 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.

Question 38

What does zero based budgeting requires?

Answer 38

That projected expenditure for existing activities should start from base zero rather than last year’s budget

Question 39

What does zero based budgeting do?

Answer 39

Focusses on programmes or activities instead of functional
departments based on line items, which is a feature of traditional budgeting.

Question 40

What is zero based budgeting best suited for?

Answer 40

Discretionary costs and support activities

Question 41

State the 3 stages of zero based budgeting?

Answer 41

• 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.

Question 42

Disclose the benefit of zero based budgeting over traditional methods of budgeting

Answer 42

1. 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.
2. Zero-based budgeting creates a questioning attitude rather than one that assumes that current practice represents value for money.
3. Zero-Based budgeting focuses attention on outputs in relation to value for money.’

Question 43

What are the criticisms of budgeting?

Answer 43

• 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.