Book:The Budgeting Process

Question 1

What are the purposes of a budget

Answer 1

It serves as a coordinating plan to motivate managers that can serve as a benchmark and base for revision.

Question 2

What is the benefit of having a common plan for the guture

Answer 2

Among other things managers gain an understanding of things outside their department and can better serve the organization as a whole

Question 3

What is a rolling or continuous budget

Answer 3

A budget that always looks a year forward every quarter

Question 4

How is revision done on a rolling budget

Answer 4

One compares the changed budget with the previous budget

Question 5

By what process are budgets often set

Answer 5

A department head advised by accountants plans a budget that has to bee approved by a budget committee often headed by the ceo

Question 6

What is a fixed budget

Answer 6

A budget that is planned annually and not changed

Question 7

What factors might restrict performance in a budget

Answer 7

Demand, retail space, production capacity

Question 8

What does it mean that a budget should be a participatory process

Answer 8

That department heads should submit their budgets to superiors with an overview and negotiate

Question 9

What is a sales budget

Answer 9

A plan of how many products the firm wants to sell and at what selling price it intends to sell.

Question 10

What is a production budget

Answer 10

The budget on how much will be produced at what time, budgeted inventory levels based on the sales budget

Question 11

What is a direct material usage budget

Answer 11

The budget entailing the material requirements to fulfill the production budget

Question 12

What is the direct material purchase budget

Answer 12

The plan entailing at what price materials should be purchased at what quantities and when to fulfill the direct material usage budget

Question 13

What is a direct labor budget

Answer 13

The budget entailing the required cost of labor to meet the demanded production

Question 14

What is production overhead budget

Answer 14

The budgeted allowance for indirect variable costs related to production

Question 15

What are selling and administration budgets

Answer 15

As they sound, the budgeted cost of this particular labor

Question 16

What are departmental budgets

Answer 16

The combined labor, material and overhead budgets divided by departments. Often broken down into monthly budgets

Question 17

What is the cash budget

Answer 17

The plan that ensures that there is always enough cash to meet the budgeted requirements

Question 18

What conflicting visions might one have with the budget

Answer 18

To use budget as a plan and motivator can be contradictory. Is accurate challenging?

Question 19

What is incremental budgeting

Answer 19

To use the past budget as a base for the new budget

Question 20

What is the disadvantage of incremental budgeting

Answer 20

That it assumes that most of the activity stays the same and is not evaluated which can lead to perpetuation of redundancy as the budget fails to motivate managers

Question 21

What is ABB

Answer 21

Activity based budgeting is when you use activity based cost objects as a base for the budget

Question 22

How is activity based budgeting performed

Answer 22

Estimate the sales volume and the demand for activities that entails. Estimate the volume of resources that are required to fulfill the activities and adjust supply to meet demand

Question 23

How are non profits budgeted

Answer 23

They don’t use revenue as a base of performance so the main focus lies in getting an overview of expenses

Question 24

What is line item budgeting

Answer 24

A budget that almost exclusively focuses on expenses, often used by non profits

Question 25

What is zero based or priority based budgeting

Answer 25

Start the budget from zero, managers need to justify all expenditure

Question 26

How does one do ZBB

Answer 26

Describe each activity as a decision package that is then ranked. Allocate all resources based on level of importance until they reach the spending cut off level

Question 27

What are the benefits of zero bases budgeting

Answer 27

It questions past costs and creates an environment of improvement at the cost of time

Question 28

What are priority based incremental budgets

Answer 28

A more in depth version of incremental budgets requiring managers to motivate their budgets in detail if changed sufficiently

Question 29

What are the flaws of budgeting

Answer 29

Encourages rigid short term incremental thinking, it is time consuming, it can limit motivation, it lock down a commitment, it can lead to arbitrary spending

Question 30

How can budgets lead to arbitrary spending

Answer 30

If a manager manages under budget and don’t want their budget decreased next period they might want to justify an increase

Question 31

What is beyond budgeting

Answer 31

An attempted improved way of budgeting entailing decentralization, a rolling forecast, ambitious target setting and external evaluation

Question 32

What are discretionary costs

Answer 32

Avoidable costs, costs that can be avoided without harm to the business

Question 33

How do you get the adjustment for non cash items in the cashflow from operating activities budget

Answer 33

You add what was removed in depreciation and other operating accruals in the result budget

Question 34

How do you see increases in provisions when adding it to the cashflow budget

Answer 34

You observe changes year on year in the balance budget

Question 35

What is tie capital

Answer 35

Accounts receivable that should be removed when translated to cash

Question 36

What should you do to calculate changes in operating receivables in the cashflow budget

Answer 36

Remove sales short term assets and add short term liabilities

Question 37

How do you calculate investing activities for the cashflow budget from the result budget

Answer 37

You add back depreciation and then check changes in assets

Question 38

What should you do in the cashflow budget if you see a decrease in long term liabilities

Answer 38

Subtract that amount as it is likely a loan payback

Question 39

How do you calculate dividends payed in the cashflow budget from the results budget

Answer 39

You check the difference between retained earnings + net income last year and this years retained earnings