Functions of Budgets

Question 1

What is a budget?

Answer 1

Plan set out in monetary terms, plans for income and expenditure of a future period of time

Question 1

Why are budgets important parts of the managerial process?

Answer 1

• set goals
• plan actions
• allocating resources
• performance measures
• rewards people

Question 2

4 steps of setting up a budget

Answer 2

1. Establish corporate mission and objectives
2. Find environmental assumptions for example limiting factors to sales
3. set budget constraint to limiting factor
4. set out all other budgets including objectives and factors

Question 3

How do you deal with a limiting factor?

Answer 3

1. identify scarce resource
2. establish how much of factor is used in each product
3. calculate contribution (sales less variable) / unit / product
4. calculate contribution of each product of the resource consumed
5. establish production ranking
6. allocate the scarce resource according to ranking

Question 4

What is a fixed budget?

Answer 4

where you compare actual results with the original budget

Question 5

what is a flexible budget?

Answer 5

flex the original budget to allow for any differences between actual level of activity and the budgeted level.

Question 6

what is an incremental budget?

Answer 6

based on previous year

Question 7

what is a zero based budget?

Answer 7

all budget must be justified in relation to aims / targets.

Question 8

Top down budget approach and its pros/cons.

Answer 8

Decision work down from a corporate level
Pros
- communication of plans
- coordination of activity
- demanding targets

Cons
- low commitment from managers

Question 9

Bottom up approach and its pros / cons

Answer 9

Reps try to ell higher
Pros
- greater management involvement
- localised knowledge
- specialist expertise

Cons
- time consuming
- undemanding targets