12 - Budgeting

Question 1

Equation for variance in the budget

Answer 1

Variance = actual - budget

Question 2

Why make budgets?

Answer 2

Planning; resource allocation; performance evaluation; control (provide a basis for a system of control); motivation (to managers for better performance; communication and coordination

Question 3

Define cost behaviour

Answer 3

How a cost will react to changes in the level of business activity

Question 4

What is top-down budget process?

Answer 4

The senior management of each budget area originates the budget targets, perhaps discussing them with lower levels of management and, as a result, refining them before the final version is produced.

Question 5

What is bottom-up budget process?

Answer 5

The targets are fed upwards from the lowest level; junior sales managers will be asked to set their own sales targets, which then become incorporated into the budgets of higher levels of management until the overall sales budget emerges.

Question 6

What is the most common budget process in practice?

Answer 6

Bottom-up

Question 7

What 3 things come from the master budget?

Answer 7

Budgeted balance sheet; budgeted income statement; cash flow budget

Question 8

Problems with budgeting

Answer 8

They are time-consuming to put together; the budget is unreasonable/wrong; budgets concentrate on cost reduction and not value creation; budgets are developed and updated too infrequently, usually annually; meeting the financial budget is not as important as meeting the maintenance schedule (e.g. the overall goal is to keep the very expensive piece of machinery running for as long as possible - therefore the fortnightly repair should not be skipped just because it goes over budget)

Question 9

What is the first budget that is usually prepared?

Answer 9

The sales budget