topic 5 - budgeting

Question 1

definition of budgeting

Answer 1

the budget is the quantitative expression of a plan for a defined period of time. it may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows

Question 2

what are the 5 main benefits to the business from budgeting?

Answer 2

1) promotes forward thinking and identification of short term problems
2) motivates managers to better performance
3) provides a basis for a system of control
4) provides a system of authorisation
5) helps coordinate the various sections of the business

Question 3

definition of planning and control

Answer 3

planning: a systematic approach to long and short term forecasting by which an organisation identifies its goals and the means of achieving them
control: the process of ensuring performance and taking suitable corrective action to implement the organisations aims

Question 4

what is the 5 step process for the development of strategic plans

Answer 4

1) establish mission and objectives
2) undertake position analysis - involves an assessment of where the business is currently placed in relation to where it wants to be
3) identify and assess the strategic options - identify various ways in which it could move closer to where it wants to be
4) select strategic options and formulate plans - selecting the best of the different courses of action and formulating a long term strategic plan. these are then broken into short term plans for each aspect of the business, known as budgets. its role is to convert the strategic plan into actionable blueprints for the immediate future.
5) perform review and control - business pursues the budgets in step 4

Question 5

what is included in the long term financial plan?

Answer 5

• development of products, markets and production facilities
• identifying future financial impacts and funding requirements
  identifying the separate programmes that need to be carried out to implement the plans in more detail, and translating these into smaller, annualised segments - the annual budget
• using the process of budgetary control as a feedback mechanism to monitor long range strategy

Question 6

how can the businesses mission, vision strategic objectives and strategic plans and budgets be summarised?

Answer 6

• the mission and visions set overall direction and is likely to last for a long time
• strategic objectives also long term will translate the missions and vision into specific and quantifiable targets
• strategic plans identify how each objective will be pursued and the budgets set out in detail the short term plans and targets necessary to fulfil the strategic objectives

Question 7

what is responsibility accounting

Answer 7

divides the organisation into budget centres, each of which has a manager responsible for its performance

the budget is the target against which the performance of the budget centre or the manager is measured

Question 8

what is the difference between a budget and a forecast?

Answer 8

A forecast tends to be predictions of the future state of the environment whereas budgets is a plan suggesting intention to achieve certain targets

Question 9

what is the difference between a periodic budget and a continual budget?

Answer 9

periodic budget = prepared for a particular period usually a one off exercise during each financial year.

continual budget = continually updated rather than running its course for that whole year like above.

Question 10

what is a master budget?

Answer 10

a larger business may produce more than one budget for a time period, each one relating to a specific aspect of the business . the contents of each individual operating budgets will be summarised in a master budget, usually consisting of a budgeted income statement and statement of financial position.

Question 11

what is the budget setting process?

Answer 11

step 1) establish who will take responsibility - these people must have real authority within the business. budget committee formed to supervise and take responsibility for the process. usually includes senior representative, of most of the functional areas of the business.
step2) communicate budget guidelines to relevant managers - produce budget manual
step 3) identify key limiting factor - this will determine the overall level of activity for the business
step4) prepare the budget for the area of the limiting factor - this will often be sales output since the ability to see if frequently the constraint on growth
step5)prepare draft budgets for all other areas - setting individual budgets can occur in two ways.
top down approach - senior management of each budget area refines the targets before final version is produced. bottom up approach - targets being fed upwards from the lower levels, eg junior sales managers asked to set their own sales target.
step 6) review and coordinate budgets
7) prepare master budgets - the individual operating budgets that have already been prepared should provide all the information needed
8) communicate budgets to all interested parties ( individual managers responsible for their implementation)
9)monitor performance relative to the budget

Question 12

remember

Answer 12

sales budget = units * selling price

budgeted production = forecast sales + closing invenotry of finished goods - opening inventory of finished goods

material usage budget = budgeted production * quantity per unit

material purchases budget = material usage budget + closing inventory - opening inventory

labour budget = number of hours * labour rate per hour

overhead budget = budgeted activity *standard overhead rate

Question 13

example of budgeting in private sector

Answer 13

Cardiff council slides 19 onwards in lecture 9

Question 14

what is incremental budgeting

Answer 14

budgeting setting often done on the basis of what happened last year with some adjustment for changes in any factors expected to affect the forthcoming budget period (eg inflation).
often used for budgets such as research development and staff training. very common in local and central government and where here are not clear relationships between inputs and outputs

Question 15

what is zero base budgeting

Answer 15

all spending needs to be justified - eg not automatically accepted that a particular training course should be financed in the future simply because it was undertaken this year. the budget will start from a 0 base, no resources at all, and will only be increased above 0 if a good case can be made for the scarce resources of the business to be allocated to this activity.

Question 16

what is the cash budget?

Answer 16

a key budget - reflects the whole business more comprehensively than any other single budget, as most economic aspects of a business are reflected in cash sooner or later.

Question 17

what are the features of a cash budget?

Answer 17

budget period broken into sub period, typical months

budget be in columnar form, one for each month

receipts of cash would be identified under various headings and a total for each months receipts shown

payments of cash identified under various headings and total for each months payments shown

surplus of total cash receipts over payments or vice versa for each month would be identified

the running cash balance would be identified by taking the balance at the end of the previous month and adjusting it for the surplus or deficit of receipts over payments for the current months

Question 18

what is activity based budgeting/

Answer 18

extends the principles of activity based costing discussed before. the first step is usually to determine sales budget, then identify activities needed to achieve the budgeted sales along with their cost drivers. for each activity, a budgeted cost driver rate is established which is then multiplied by the estimated usage of the cost driver . this final calculation provides the activity budget for the period.

Question 19

advantages and disadvantages of ABB

Answer 19

adv:
budget based on cost drivers should more accurately reflect the cause of costs
enables focus on overhead and support costs

disadvantages:
costing system needed to match (ABC)
time consuming and costly
may require a cultural change

Question 20

remember

Answer 20

it is mostly companies with more than 10,000 employees who use ABB, but loads of other companies use it too

Question 21

remember

Answer 21

non financial targets and measures can also be brought into the budgeting process, they can be reported alongside the financial ones

Question 22

criticisms of budgets

Answer 22

in todays highly dynamic and competitive environment, budgets may actually be harmful to the achievements of the business’ objectives;

• cannot deal with fast changing environment and are often out of date before start of budget period
• focus too much management attention to short term targets rather than things that can create permanent value for the business
• takes up enormous amount of time that could be better used
• can protect costs rather than lower costs, particularly in the area f discretionary budgets
• promote “sharp” practise among managers , helps them build slack into the budgets so meeting them becomes easier.