chapter 14

Question 1

budget

Answer 1

a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan.

Question 2

budgeting cycle

Answer 2

1. plan performance of the organisation and its subunits
2. provide a frame of reference
3. investigate variations from plans. if necessary, take corrective action
4. plan again, consider feedback and changed conditions

Question 3

frame of reference

Answer 3

a set of specific expectations against which actual results can be compared

Question 4

master budget

Answer 4

coordinates all the financial projections in the organisation’s individual budgets in a single organisation-wide set of budgets for a given time period. it embraces the impact of operating decisions and financing decisions.

Question 5

strategy

Answer 5

describes how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives

Question 6

overcoming two limitations of using past performance as a basis for judging actual results by using budgeted performance measures

Answer 6

1. past results incorporate past miscues and substandard performance
2. the future may be expected to be very different from the past

Question 7

coordination

Answer 7

the meshing and balancing of all factors of production or service of all the departments and business functions, so that the company can meet its objectives.

Question 8

communication

Answer 8

getting those objectives understood and accepted by all departments and functions.

Question 9

zero-based budgeting (ZBB)

Answer 9

a budgeting approach in which all expenses are to be justified rather than assumed to be modelled based on the previous period. what is required for the upcoming period has to be though through irrespective of whether each element of cost was higher or lower than in the past.

Question 10

rolling budget

Answer 10

a budget or plan that is always available for a specified future period by adding a month, quarter, or year in the future as the month, quarter, or year just ended is dropped. for example, there is always a 12-month budget in place.

Question 11

operating budget

Answer 11

the budgeted profit statement and its supporting budget schedules.

Question 12

financial budget

Answer 12

that part of the master budget that comprises the capital budget, cash budget, budgeted balance sheet, and budgeted statement of cash flows. it focuses on the impact of operations and planned capital outlays on cash.

Question 13

budgeted financial statements

Answer 13

sometimes called pro forma statements.

Question 14

padding/budgetary slack

Answer 14

refers to the practice of underestimating budgeted revenues in order to make budgeted targets more easily achievable.

Question 15

steps of preparing an operating budget

Answer 15

1. revenue budget
2. production budget (in units)
3. direct materials usage budget and direct materials purchases budget
4. direct manufacturing labour budget
5. manufacturing overhead budget
6. closing stock budget
7. cost of goods sold budget
8. other (non-production) costs budget
9. budgeted operating profit statement

Question 16

sensitivity analysis

Answer 16

a ‘what-if’ technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes. it enhances the value of budgets to managers in their strategic analysis and planning.

Question 17

organisational structure

Answer 17

an arrangement of lines of responsibility within an entity.

Question 18

responsibility centre

Answer 18

a part, segment, or subunit of an organisation whose manager is accountable for a specified set of activities.

Question 19

responsibility accounting

Answer 19

a system that measures the plans and actions of each responsibility centre. four major types: cost centre, revenue centre, profit centre, and investment centre.

Question 20

cost centre

Answer 20

manager is accountable for costs only.

Question 21

revenue centre

Answer 21

manager is accountable for revenues only.

Question 22

profit centre

Answer 22

manager is accountable for revenues and costs.

Question 23

investment centre

Answer 23

manager is accountable for investments, revenues, and costs.

Question 24

variance

Answer 24

the difference between the actual results and the budgeted results. used to pinpoint fault for operating problems in responsibility accounting.

Question 25

controllability

Answer 25

the degree of influence that a specific manager has over costs, revenues, or other items in question.

Question 26

controllable cost

Answer 26

any cost that is primarily subject to the influence of a given manager of a given responsibility centre for a given time span.

Question 27

cash budget

Answer 27

a schedule of expected cash receipts and disbursements. it predicts the effects on cash position at the given level of operation.

Question 28

cash budget main sections

Answer 28

1. total cash available before financing
2. cash disbursements
3. financing requirements depend on how the total cash available for needs compares with the total cash needed
4. closing cash balance

Question 29

self-liquidating cycle/working-capital cycle/cash cycle/operating cycle

Answer 29

the movement from cash to stock to debtors and back to cash.