Budgeted Income Statements/SOFP + Notes on budgets

Question 1

What workings may you need to do in order to create a budgeted income statement

Answer 1

Last years selling price
This years selling price

Expected no of units to be sold

Next years budgeted revenue

Last years purchase price
This years purchase price

Units and value of next years opening inventory
Closing inventory and units

Updated purchase figure

Question 2

How to calculate last years selling price

Answer 2

Revenue (£) / Revenue (Units)

Question 3

How to calculate expected no of units

Answer 3

Revenue (units) x increase/decrease in no of sales

Question 4

How to calculate this years selling price

Answer 4

Last years selling price X increase/decrease in unit selling price

Question 5

How to calculate next years budgeted revenue

Answer 5

Expected no of units to be sold (revenue units) X this years selling price

Question 6

How to calculate last years purchase price

Answer 6

Purchase (£) / Purchase (Units)

Question 7

How to calculate this years purchase price

Answer 7

Last years purchase price + increase of unit purchase price

Question 8

How to calculate opening inventory

Answer 8

From the closing inventory of last years budgeted income statement

Question 9

How to calculate closing inventory

Answer 9

Units from last year x % decrease in purchase selling price x this years purchase price

Question 10

What are budgets

Answer 10

Planned levels of income or expenditure in the business

Question 11

What is a variance

Answer 11

The difference between predicted figures and actual figures from budgets

Question 12

Benefits of budgets

Answer 12

Control: Departments are set limits of expenditure
———-
Communication: Between departments between employees and managers
———–
Improved decision making: Managers are better informed if there is more information avaliable

Question 13

Limitations of budgets

Answer 13

Budgets can be restrictive and prevent improved business performance
———-
Budgets can take time to prepare: This can cause managers to neglect other areas of the business

Question 14

What is zero based budgeting

Answer 14

budgets are set at zero and managers have to justify every item of expenditure

Question 15

Advantages of zero based budgeting

Answer 15

It avoids new budgets automatically creeping upwards every year

Question 16

Disadvantages of zero based budgeting

Answer 16

more time consuming than incremental budgeting