Topic 6 Performance measurement budgeting

Question 1

What is a budget

Answer 1

A detailed plan (in financial and non-financial terms) of
management activities for a certain time period – normally a 12-month period. The budget essentially reflects the short-term goals of the primary decision-makers.

Question 2

What is a budget linked to

Answer 2

Linked to the organisation’s long-term strategic plans and
goals. The strategic plan usually identifies:
• How product value is to be created;
• The external factors- social, environmental, technological.

Question 3

Why budgeting is important

Answer 3

The budget is one of the most important means of
communication and coordination. The budget is an essential tool for planning,
organising and controlling activities.

Question 4

Whom are budgets provided to

Answer 4

Budgets are usually provided to those people within the organisation who have
responsibility (and are held to account) for the resources (e.g., labour, materials, cash)
used in undertaking particular activities. This might be, for example, the marketing
manager (for meeting sales goals), the purchasing manager (for purchasing the correct amount and quality of supplies at certain prices) or the IT manager (for supplying
services and hardware to various activities). Each of these managers will have goals for
their activity area that link to the overall goal of the organisation.

Question 5

Budgets and planning - Setting goals

Answer 5

The budget is also a way of indicating to people
those factors that are considered important. Changing organisational goals will usually be reflected in budget changes. Budget goals may also act as a form of motivation for
those who are held responsible for its delivery and achievement.

Question 6

Budgets and organising - allocating resources and responsibility

Answer 6

When setting budgets, resources need to be allocated to the different activity areas. The manager is responsible for the efficient and effective use of resources. Rewards for managers may be attached to meeting their budget goals.

Question 7

Budgets and controlling - measuring performance

Answer 7

Comparing actual results with budgets (the differences
are called variances). Provides a basis for evaluation of the performance of
organisation. This can be linked to formal incentives, such as cash rewards, promotions, awards or profit sharing.

Question 8

The Master (Annual) Budget

Answer 8

The master budget is a comprehensive set of budgets
that cover all aspects of a firm’s activities. The master budget consists of several interdependent
budgets

Operating budgets
Financial budgets

Question 9

Operating budgets

Answer 9

Operating budgets include the sales budget and the various

cost budgets

Question 10

Financial budgets

Answer 10

Financial budgets consist of the budget statement of

financial performance, the budgeted statement of financial position, the cash budgets

Question 11

Sales budget

Answer 11

A detailed summary of the estimated sales units and revenues from the organisation’s products for the budgeted year. Its based on the sales forecast, which involves estimating which products will be sold and in what quantities. Sales forecasting is a critical step in the budgeting process and market research is often used.

Question 12

Factors to consider when forecasting sales include

Answer 12

Internal factors: e.g. past sales levels; new products planned;

External factors: e.g. general economic trends, specific
industry trends.

Question 13

Cost budgets for manufacturing firms

Answer 13

• A production budget, which has cost budgets for direct
materials, direct labour and overheads.
• Budgets for marketing, general and administrative expenses.

Question 14

Cost budgets for retailers and wholesalers

Answer 14

• A purchasing budget, will be used to determine the quantity and cost of goods purchased for resale.
• Budgets for marketing, general and administrative expenses.

Question 15

The financial budgets

Answer 15

Cash budget
Budgeted income statement
Budgeted balance sheet

Question 16

Sales budget format

Answer 16

Business Sales Budget for the year ending

Expected sales units
Selling price
Total Sales revenue

Photo 1

Question 17

Production budget format

Answer 17

Business Production Budget for the year ending

Expected sales (units)
Add: Desired ending inventory
Less: Beginning inventory
Required production units

Photo 2

Question 18

Material budget format

Answer 18

Business Material Budget for the year ending

Units to be produced
Material cost per unit
Cost of material required for production 
Target ending materials inventory 
Total material required
Less: Beginning materials inventory 
Total cost of materials purchases 

Photo 3

Question 19

Labour Budget format

Answer 19

Business Labour Budget for the year ending

Units to be produced
Labour time per unit
Total required labour hours
Labour cost per hour
Total labour cost

Photo 4

Question 20

Overhead budget format

Answer 20

Photo 5

Question 21

Selling and administrative expenses budget format

Answer 21

Photo 6

Question 22

Cash budget format

Answer 22

BUSINESS
CASH BUDGET
FOR THE TWO MONTHS ENDED

Beginning cash balance
Add: Receipts 
etc
Total Available Cash
Less: Disbursements 
etc
Excess (deficiency) of available cash over disbursements 
Financing 
Borrowings
Repayments
Ending Cash balance

Photo 7

Question 23

Behavioural aspects of budgeting

Answer 23

Budgets affect virtually all people in an organisation:
• Those who prepare the budget;
• Those who use the budget for decision making; and
• Those whose performance is evaluated using the
budget.

Question 24

3 approaches to budgeting

Answer 24

Participative budgeting
Top-down budgeting
Bottom-up budgeting

Question 25

Participative budgeting

Answer 25

managers at all levels develop

their budgets.

Question 26

Top-down budgeting

Answer 26

senior managers impose budget targets.

Question 27

Bottom-up budgeting

Answer 27

lower managerial and operations levels play an active part in budget setting

Question 28

Budget as a means of communication

Answer 28

The budget is one of the most important means of communication within an organisation and is essential for planning, organising and controlling activities. For example, to measure performance of an activity, a specific goal/objective must be clearly established in the first instance and resources organised and allocated to allow the goals in that
activity area to be achieved.

Question 29

Budgeting and the coordination of activities

Answer 29

As budgets for different activities are constructed, the different activity areas of the
organisation are required to communicate and plan the coordination of activities, e.g.,
marketing, purchasing and production need to align activities to ensure that a product of value to the customer is provided on time and at the quality required. The finance department must ensure it has sufficient cash to allow these activities to be undertaken. You might notice here some similarities to the idea of a “value-chain”.

Question 30

Budgeting is a way of indicating to people

Answer 30

those factors that are considered important. Changing goals will usually be reflected in budget changes.

Question 31

Budgeting as a source of feedback

Answer 31

Budgets are also an important source of “feedback” which occurs when planned
performance is compared with actual performance. Differences are examined and
corrective action taken if needed; to ensure goals will be achieved. Budget comparisons
with actual performance, and the related feedback, also provide an account to those held responsible for the activities on how they and their activity area have performed.

Question 32

Type of information included in a budget

Answer 32

The type of information included in a budget can include both financial (e.g., sales revenue - $) and non-financial (e.g., number of product returns) and is influenced by the particular goals for that activity area (e.g., marketing or production targets).

Question 33

Production budget

Answer 33

A production budget includes cost budgets for direct materials, direct labour and
overheads. Direct materials are those physical resources used to manufacture a product,
e.g. wood used for creating a desk is considered a direct material. Direct Labour is the
cost of the human resources such as labourers who work to create the product, e.g., the
payment for the cabinet maker who constructs the desk but excludes costs of managers
and sales people. These costs that relate only to the manufacturing process are
described as direct. Overheads are the other resources used in the production process
such as cost of electricity or heating for the factory.

Question 34

Budgets for marketing, general and administrative expenses

Answer 34

General and administrative
expenses include resources used for activities other than the manufacturing process, e.g.
advertising costs, payments to managers and accountants, repayment of interest on
loans.

Question 35

The cash budget

Answer 35

Expected cash receipts and planned cash payments. The timing of all cash movements is important to identify cash shortages and cash surpluses.

Question 36

Budgeted statement of financial performance (profit and loss)

Answer 36

Shows expected

revenues and planned expenses for the budget period.

Question 37

Budgeted statement of financial position (balance sheet)

Answer 37

Expected assets and liabilities

at the end of budget period.

Question 38

Budget admin

Answer 38

In large organisations, formal processes are often used to collect data and prepare the
budget. Budget administration is often the responsibility of the senior accounting managers. A budget manual may be developed to communicate who is responsible for providing
various types of information, when the information is required and what form is it to take. A budget committee is often appointed to advise the accountants during the preparation
of the budget.

Question 39

Advantages of participative budgeting

Answer 39

Participative budgeting generally encourages coordination and communication between
managers and a greater understanding and appreciation of the wider organisation. It may
also lead to more accurate budget estimates, as those close to the operations have the best knowledge of the likely sales or costs in their area and this approach provides a greater level of motivation for people to work toward budget goals.

Question 40

Budget acceptance is generally more likely when:

Answer 40

• Targets are developed with employee participation
• Targets are considered achievable
• There is frequent feedback on performance
• Employees are held responsible for activities that are within their control
• Achievement of targets is accompanied by rewards that are valued
• Budgets must be set at a level that provides challenges and stretch, but not too difficult.