Budgeting Flashcards
(25 cards)
What is the general purpose of a Budget?
To give an idea of the costs and revenues that are expected to be incurred or earned in future periods.
Name some other budgets that may be prepared by organizations.
Departmental
Functional (sales, production, expenditure, etc)
Profit or loss account (future profits)
Cash (future cash flows)
What are the main aims of budgeting?
(8)
- Planning for the future.
- Controlling costs.
- Co-ordination.
- Communication.
- Motivation.
- Evaluation.
- Authorization.
- Resource allocation.
What are the stages of The Budgetary Process?
5 stages
- Long-term objectives.
- Budget committee.
- Budget manual.
- Limiting factor*.
- Other functional budgets produced.
Explain what is meant by Limiting factor (principal budget factor).
There will be one factor that will limit the activity of an organization in a given period.
E.g. Sales can limit an organization’s performance.
The budget for the limiting factor MUST be drawn up first.
What are the final stages of the budget process?
(4)
- Initial budgets are prepared.
- Initial budgets are reviewed.
- Master budget is prepared.
- Comparison of budget and actual results.
What are the main functional budgets that you need to be able to prepare?
Sales
Production
Raw materials usage
Rae materials purchases
Labour
What is a functional budget?
Is a budget of income and expenditure which applies to a particular function.
The sales budget is calculated as …
Sales budget = sales volume x selling price per unit
The production budget can be calculated as …
Sales Budget
+ Closing inventory of finished goods
- Opening inventory of finished goods
= Good / fault-free production required
+ Faulty production / wastage
= Total Production
Material usage budget is calculated as …
Production budget x standard material usage per unit.
Material purchases budget is calculated as …
Materials usage budget quantity
+ closing inventory of materials
- opening inventory of materials
= Budgeted material cost (quantity @ Standard cost of materials £)
Labour budget is calculated as …
Number of hours x labour rate per hour
What is the Master Budget?
The budget in which all subsidiary budgets are consolidated.
What does the master budget normally comprise of ?
Budgeted profit or loss account
Budgeted balance sheet
Budgeted cash flow statement
What does the Master Budget - profit or loss account look like?
What does the Master Budget Balance Sheet look like?
What is sensitivity analysis?
It involves revising budget assumptions and examining the impact that this has on the budget.
Why is sensitivity analysis useful?
It can identify which assumptions have the greatest impact on the budget and which assumptions need to be considered most carefully when setting the budget.
Name the parts of the equation of a straight line:
y = a + bx
a - the intercept, the point at which the line cuts the y-axis.
b - gradient of the line, the change in y when x increases by 1 unit.
x - independent variable.
y - dependent variable.
Name the parts of the cost equation:
y = a + bx
a - fixed cost per period
b - variable cost per unit
x - activity level
y - total cost = fixed cost + variable cost.
What is the High-low method in preparing forecasts?
HLM is based on an analysis of historical information about costs at different activity levels.
It estimates the equation of a straight line between highest and lowest activity levels.
What are the steps in the High-low method?
- Determine the highest and lowest ACTIVITY levels and their associated costs.
- Find the variable cost per unit.
- Find the fixed cost.
- Calculate the expected cost.
How do you work out forecast sales from linear regression with seasonal variation?
Y = a + bx
Substitute appropriate value for x to find Y.
Y is the Trend.
Forecast sales = Trend x seasonal variation.
