Week 7

Question 1

What is budgeting?

Answer 1

A financial plan of action relating to a given period, typically one year or less, the identifies how much a business would earn, spend or save, based on how much funds are available.

Question 2

What are the most common types of budgets ?

Answer 2

• Master budget
• Cash budget
• Capital budget
• Operating budget

Question 3

What is the point of budgeting?

Answer 3

Planning ( goal setting)

Control ( ensure we are moving towards our goals)

Question 4

So why is budgeting useful?

Answer 4

Allocating resources to a number of departments

forcing managers to think long term

Question 5

What is a master budget?

Answer 5

It is at the top of the cascade, and appear very similar to the published financial accounts.

It has components of a operating budget ( like income statements, expenses etc)

Also has a compoment of financial budget ( like balance sheet budget )

Question 6

What are the componments of a master budget will we look at?

Answer 6

Sales budget ( also includes SGA)

Production budget

Direct materials budget

Direct labour budget

We will also look at cash budget

All of these are interelated, how can we do in production budgetm without knowing the direct materials budget etc.

Question 7

So what are the steps that we will look at in this course in terms getting an operating budget?

Answer 7

1) Start with sales budget
2) Work out production budget = budgeted sales (units) + target closing stock (units) – opening stock (units)
3) Work out direct materials purchases budget for units to be produced
4) Work out direct labour budget
5) Work out overheads budget
6) Compute unit costs of finished goods; compute closing inventory budget (in monetary terms)

Question 8

How do we work out the sales budget?

Answer 8

We are given a forcasted sales, then we times by the selling price to give us total sales.

Question 9

What is the total sales budget?

Answer 9

Question 10

Lets say 70% is scales made in that quarter and the rest is the sales in the next quarter, find out, this for all the 4 quarters?

Answer 10

In the last quarter we write 280000 and the remaining goes to the next quarter,.

Question 11

How do we work out a production budget?

Answer 11

Bugeted sales( units) + (target)closing inventory stock(units)= Total needs - opening stock( units) = required production.

Question 12

Budgeted sales of RED for December are 18,000 units. At the end of the production process for RED, 10% of production units are scrapped as defective. Opening inventories of RED for December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All inventories of finished goods must have successfully passed the quality control check. What is the budgeted number of units to produce for RED for December?

Answer 12

Question 13

What is the production budget for this?

Answer 13

Question 14

How do we calculate raw material budget?

Answer 14

Required production in the production budget ( X raw materials needed) = Raw materials needed to meet production or usage

+

Desired ending raw materials inventory

= Total raw material needs

-

Beginning raw materials inventory

=

Raw materials to be purchased ( we might be given cost per pound so you times with raw mateirals to be purchased to give us a total answer)

Question 15

Answer 15

Question 16

LETS SAY we the required production in cases is 14000 ( period 1) 32000( period 2) 36000( period 3) 19000 (period 4)

Raw material requiried per pound is £15

Desired closing inventroy is 10% of raw mateirals needded to meet production of next period ( for period 4 its assumed its 22500)

and cost of raw materials to be purchased per pound is 0.20 $

what is the cost of raw mateirals to be purchased

Remember opening inventory is closing inventory from last year. ( year 1 is assumed its 21000)

Answer 16

Question 17

How do we calculate direct labour budget?

Answer 17

multiply the number of units to be produced (from the production budget) by the direct labor time needed to make each unit.

Question 18

Answer 18

Production budget X direct labour hours for the period

Question 19

What is the cash budget?

Answer 19

A cash budget is a company’s estimation of cash inflows and outflows over a specific period of time.

All the prior budgets must be made before this.

We have cash budgets to aviod any idle unnecessary cash sitting there.

Question 20

Give examples on why profit is diffrerent to cash?

Answer 20

provisions, e.g. for bad debts • receivables vs sales • purchases vs payables • inventory vs purchases • accruals and prepayments

Question 21

How do we calculate cash budget?

Answer 21

TBA

Question 22

Complete this Q

Answer 22

w

Question 23

Answe this Q

Answer 23

fdf

Question 24

ddfd

Answer 24

fd

Question 25

What is a top down budgget approach?

Adv and Disadv

Answer 25

Senior management make budget and transfer it down

Adv Pace and control

Disadv Inaccurate, underperformance and staff morale

Question 26

What is bottom up approac budgeting and ADV AND DISADV?

Answer 26

he process starts in the individual departments where managers create a budget and then send it upwards for approval.

ADV better staff morale

DISADV - budgetary slack ( easy income targets or higher spending targets.

Question 27

What type of budgetary systems will we look at today?

Answer 27

Incuremental budgets

Zero based budgets

Rolling budgets

Flexible budgets

Activity based budgets

Question 28

What is a incuremental budget?

Answer 28

Incremental budgeting is a method of budgeting in which next year’s budget is prepared by using the current’s year’s actual results as a starting point, and making adjustments for expected inflation, sales growth or decline and other known changes.

Question 29

What is flexible budget?

Answer 29

A flexible budget is a budget that adjusts or flexes with changes in volume or activity.

Question 30

Can a incurmental budget be used for adversiting?

Answer 30

Advertising expenditure, not so easily quantifiable and is more discretionary in nature. Could lead to slack and wasteful spending to creep into the budget.

Question 31

What is a rolling budget and disadv?

Answer 31

Continuously updated by adding a further accounting period (month/quarter) when the earliest accounting period has expired. Its use is particularly beneficial where future costs and/or activities cannot be forecast accurately.

Budgets are made more continously

DISADV

You need to get data all the time for rolling to work

Question 32

Calculate this rolling budget?

Answer 32

Question 33

What is zero based budgeting and disadv?

Answer 33

You convince management that you need that much money for your department

Disadv

Be more costly to implement

Question 34

What are 2 advantage ofs of Zero based budgeting?

Answer 34

It forces employees to avoid wasteful expenditure.

It can increase motivation of staff by promoting a culture of efficiency

It also challenges the status quo.

Question 35

What is also a massive disadvantage of zero based budgeting?

Answer 35

It might give the impression that all decisions have to be made in the budget.

Question 36

What is activity based budgeting

and advantage?

Answer 36

More accurate budgeets

Closer links between costs and management responsibilities.

Question 37

So to summarise what is an advantage and disadvantage of budgeting?

Answer 37

Promote forward thinking and identification of short-term problems

Make people feel undervalued

Question 38

What academic studies have we learnt about in budgeting?

Answer 38

Argyris ( 1953 Human problems with budgets)

Question 39

What was Argyis main argument in his paper?

Answer 39

Believed that managers who treat people positively and as responsible adults will achieve productivity.

He wanted to see how finance people and factory people actually work with budgets

Question 40

What was the reaction to budgets by factory people if it was met and if it was not met?

Answer 40

– If met: sense of personal success

– If missed: Sense of personal failure and embarrassment

Question 41

Do budgets increase efficiency for Argyris?

Answer 41

Budgets ultimately fail to increase human efficiency

Question 42

How did workers see budgets?

Answer 42

They saw it as a pressure mechanism, and became suspicious that management was against them.

Question 43

How did formen and superivisors react to budgets in aygris paper 1953?

Answer 43

of different departments tried to blame each other for shortfalls against budget. They became frustrated and de-motivated, because they had no say in budgeting process. ‘He cannot join a group against management, as his workforce does. For one thing, he probably has at least partially identified him with management. For another, he may be trying to advance in the hierarchy.’

Question 44

How did Budget suprerivisors react to budgets?

Answer 44

became defensive; people perceive their role as being “the watchdog of the company.” Budgets promoted self-interested behaviour of departmental heads.

Question 45

In the paper, the factory workers were given a chance to do some particptative budgeting but utimately what happened?

Answer 45

Didnt really have a difference, because utimately they didnt have the power to make final position.

Question 46

So according to agryis if budgets are too tight then what?

Answer 46

If too tight, can be used as a pressure device: better to be tight but attainable.

• If used as a pressure device, intra-organisational conflict can result

It can lead to blame culture too

Question 47

‘The princple of a cash budget is to see how much cash there would be in business bank account at the end of the year? do you agree explain?

Answer 47

The main purpose is to match the receipts and payments and to have a desired supply at the end of each month. If it is seen that the payments of a particular month could not be met with the possible recepits, budget tells you sufficiently in advance.