Budget

• What is budgeting defined as?

  Quantitative expression of a plan
• What is the purpose of a budget?

  To provide a plan for the future
• What are the two main types of budgets?

  Periodic and Continual
• What is the difference between a periodic and a continual budget?

  Periodic is prepared for a set length of time, while continual is continually updated
• What is an annual budget?

  A budget prepared in advance for 1 year
• What is the purpose of a rolling budget?

  To continually update the budget as each month elapses
• What is incremental budgeting?

  Using the previous budget as a base and increasing expenditure by a determined amount
• What is zero-based budgeting?

  Ignores previous budgets and requires budgetary allocations to be justified by managers
• What are the functions of budgets?

  • Planning
  • Co-ordination
  • Control
  • Motivation
  • Authorisation of expenditure
  • Communication
  • Performance evaluation
• Why is a budget important for a business?

  It provides a clear idea of expectations in terms of financial position and performance
• What is a master budget?

  An overall picture of the planned performance for the budget period
• What are the components of a master budget?

  • Cash budget
  • Budgeted Income statement
  • Budgeted Balance sheet
• What is the purpose of a sales budget?

  To provide predictions of total revenue
• How is the number of units to be manufactured each month calculated?

  Using the estimated opening inventory, the number of units estimated to be sold, and the desired closing inventory
• What is the purpose of a production plan?

  • To calculate the number of units to be manufactured each month
  • To calculate the cost of production for each month
• What is a cash budget?

  A budget that outlines the predicted cash inflows and outflows for a business
• Why is a cash budget important?

  To ensure sufficient cash is available to meet demands and carry out activities
• What are the stages of the budgeting process?

  • Review, check and revise budgets
  • Identify limiting factors
  • Prepare master budget
  • Regular review
  • Form budget committee
  • Define long term objectives
  • Prepare an initial set of budgets
  • Prepare budgets
  • Communicate to management
• What is the relationship between budgeted and actual profit?

  Actual profit equals budgeted profit plus favourable variances minus adverse variances
• What is a sales variance?

  The difference between actual sales revenue and budgeted sales revenue
• What are the types of sales variances?

  • Sales volume variance
  • Sales price variance
• What is the purpose of variances in the review process?

  To identify specific areas that require more focus
• What are the criticisms of budgeting?

  • Focus on short term
  • Quantitative rather than qualitative
  • Re-enforce "command and control"
  • Restrict activities
  • Time consuming to set
  • Based around business functions
  • Protect costs
  • Encourage manipulation of accounts
• What is required to make budgetary control effective?

  Clear demarcation between areas of managerial responsibility, budget targets that are challenging yet achievable, and a serious attitude taken to the system
• What is budgeting?

  Financial plan for the future
• What does a budget provide to businesses?

  Quantitative expression of a plan
• What are the four types of budgets mentioned?

  Periodic, Rolling, Incremental, ZBB
• What is the main difference between a periodic budget and a rolling budget?

  Periodic is fixed, Rolling is continuously updated
• What is incremental budgeting based on?

  Previous budget, adjusted for changes
• What is the main characteristic of zero-based budgeting (ZBB)?

  Starts fresh, without referring to past budgets
• What are the benefits of budgeting?

  Planning, controlling, motivating, and resource allocation
• How does budgeting help in planning and controlling activities?

  By allocating funds effectively and providing a quantitative expression of a plan
• What are the four stages of budgeting mentioned?

  Sales Budget, Production Plan, Cash Budget, Master Budget
• What is the purpose of a sales budget?

  Estimates revenue based on sales forecasts
• What are the key factors in estimating sales revenue?

  Previous year's performance, staff judgment, market research
• What is the purpose of a production plan?

  Determines how many units to produce based on sales forecasts and inventory levels
• What is the formula for calculating the number of units to produce?

  Desired closing inventory + Estimated sales - Opening inventory
• What is the purpose of a cash budget?

  Tracks inflows and outflows of cash to ensure sufficient cash to operate
• What is the formula for calculating closing cash?

  Opening cash + Receipts - Payments
• What is the purpose of a master budget?

  Combines all budgets and provides a comprehensive financial plan