Budget Preperation - 30% Flashcards
What are the uses for budgets?
Planning
Communication
Coordination
Responsibility accounting
Control
Motivation
Who is responsible for repairing budgets
- the responsibility should lie with the managers who are responsible for implementing them
Rewards for managers can be built into the budget process and their achievement of the budget targets.
What is the 8 steps and the order of budget preparation
- Identify the Principle budget factor ( the factor which limits the activities of an organisation )
- Prepare a sales budget ( units of product and sales vale ) and then a finished goods inventory budget ( to determine the planned change in finished goods inventory levels )
- Rep are a production budget ( sales + budgeted change in finished goods inventory levels, in units)
- Prepare production resources budgets ( material usage, machine usage, labour )
- Prepare a material inventory budget ( to determined the plan in materials inventory level )
- Prepare a raw materials purchases budget in units and value ( usage + budget change in materials inventory )
- Prepare overheads budget
- Prepare the master budget ( budgeted statement of profit or loss, budgeted statement of financial position, cash budget)
What do functional ( department budgets ) include
They include the sales budget, production budget, materials and labour budgets
What are the steps to prepare a cash budget ?
- Set up a proforma
- Establish the budgeted sales month by month. Bearing in mind the credit period taken by customers and taking discounts into account, calculate when budgeted sales revenue will be received as cash and when opening receivables will pay.
- Establish when any other cash income will be received.
- Establish for each month, production quantities hence materials usage quantities, materials inventory changes and the quantity and cost of materials purchases. Bearing in mind the credit period taken, calculate when cash payments to suppliers will be made and when the amount due to opening payables will be paid.
5 establish when any other cash payments ( excluding non- cash items such as depreciation ) will be paid.
What is the appropriate management action for a short term surplus in thr cash position
- pay suppliers early to obtain discounts
- attempt to increase sales by increasing receivables & inventories
- make short term investments
What is the appropriate management action for a short term shortfall in the cash position
- increase accounts payable
- reduce receivables
- arrange an overdraft
What is an appropriate action for management when there is a long term surplus in the cash position ?
- make long term investments
- expand
- diversify
- replace/ update non-current assets
What is an appropriate action for management when there is a long term shortfall in the cash position ?
- raise long term finance ( such as via an issue of share capital)
- consider shutdown/disinvestment opportunities
Cash flow versus profit
- not all cash receipts affect statement of profit or loss income ( e.g issue of new shares )
- not all cash payments affect statement of profit or loss expenditure ( e.g purchase of non-current assets )
- some items in the statement of profit or loss are not cash flows (e.g depreciation )
- timing of cash receipts and payments may not coincide with statement of profit or loss recording ( e.g sales vs receipts from receivables)
What are the 6 approaches to setting a budget ?
- incremental
- zero based
- rolling
- participative
- budget slack
- imposed
Incremental budgets
Set using the current years results plus growth/ inflation, or (especially in the public sector ) minus funding cuts/negative growth
Zero based budgets
Every item of expenditure is built up from zero allocation
Rolling budgets
Budget holders are able to take part in setting their own budgets
Budget slack
Intentionally overestimating expenses and/or underestimating revenues in order to make the budget easier to achieve or give the appearance of over - performance
