Budgeting Flashcards
(33 cards)
What is the purpose of budgeting
to provide a financial plan that helps businesses control their resources, achieve their objectives, and make informed decisions. It involves estimating income and expenses for a specific period, typically a year, and allocating resources accordingly
What does a sales budget show
what can the business expect to sell in the coming months in revenue or units
What does a production budget show
how can business make / supply all the items it plans to sell
What does a purchases budget show
what does the business need to buy to make / supply the goods it plans to sell
What does a labour budget show
what will be the cost of the labour to make / supply the goods and how many labour hours are available/required
What does a cash budget show
what money will be flowing in and out of the bank account - is an overdraft needed?
What does a master budget show
a summary of all the budgets to provide a forecasted income statement and statement of financial position
What is incremental budgeting
new period’s budget is created by making small adjustments to the previous period’s budget, typically based on factors like inflation, expected changes in costs etc
Give an advantage of incremental budgeting
Easy to prepare
Suitable for stable businesses
Give a disadvantage of incremental budgeting
Inefficient and overspending
Spend to ensure receive next year’s budget
uneconomic
What is zero-based budgeting
all expenses must be justified for each new period, starting from zero, rather than using prior period budgets
Give an advantage of zero-based budgeting
All expenditures have to be justified = Inefficiencies and overspending identified
Link to objectives of the business
Input from staff
Give a disadvantage of zero-based budgeting
Time consuming
Difficult to prepare
Not cost-effective
Not forward thinking
What is budgetary control
The process of using budgets to monitor actual results against budgeted figures. The management of a business will monitor a budget during the year and watch closely for variances.
Give 3 benefits of budgeting
Assists Planning - the formal framework of budgets is used to predict future activities and highlight potential problems
Coordination - all departments working towards the end goals
Decision making - planning ahead = can make decisions on the amount of output to be achieved
Monitor and Control - management able to monitor & compare results against a budget. Action can be taken if budget becomes unachievable
Motivate - can be used to motivate managers and staff - it can be linked to rewards and bonuses if achieved
Give 3 limitations of budgeting
Budgets are only as good as the data being used - if the data is inaccurate the budget will be of little use
Budgets may de-motivate staff if they are imposed rather than negotiated or set too high
Budgets may lead to departmental rivalry
Budgets may be set too low
Budgets may restrict activity - they may be inflexible so that staff cannot take advantage of opportunities
What are benefits of a production budget
Enables a business to identify the production capacity available
Enables a business to schedule resources efficiently (cash, materials, labour)
Enables a business to meet sales demand
Enables a business to make the best use of spare capacity
What are limitations of a production budget
Developing an accurate production budget can be complex and resource-intensive, particularly for companies with multiple product lines or varying production processes
In sectors where technological innovations or market trends shift rapidly, a static production budget may quickly become obsolete
Since the production budget is directly linked to both the sales forecast and inventory assumptions, any error in these upstream estimates propagates through to production planning
What are benefits of a cash budget
Identify any possible bank overdraft in advance and takes steps to minimise the borrowing
Consider rescheduling payments to avoid bank borrowing, e.g. delay buying NCA
Arrange possible bank finance in advance
Identify any possible cash surpluses in advance and take steps to invest on a short term basis so its earning interest
Give 2 limitations of a cash budget
effectiveness critically dependent on the accuracy of cash flow estimates
In rapidly changing or volatile markets, predetermined figures might quickly become outdated
it does not encompass non-cash elements such as depreciation or accruals that are vital for full financial performance analysis
can be labor-intensive and complex
What are benefits of a master budget
• the budgeted profit can be calculated and compared with the actual profit of the previous year
• the budgeted profit shows the effect of changes in the selling price of products, the volume of units sold, the buying price, and in expenses
• management of a business can take action by reviewing their selling prices, volume of sales, buying prices, and overhead expenses
• the actual gross and profit for the period can be compared with the budgeted profit. and any differences can be investigated
What are limitations of a master budget
process of producing a master budget is often labor-intensive & can create delays in finalising the budget = may limit usefulness if not updated frequently
designed for typically a year and may end up focusing too much on short-term performance metrics. This focus can sometimes overshadow longer-term strategic initiatives or investment opportunities
master budget comprises many individual budgets = an error or inaccurate assumption in one area can cascade throughout the entire system
Give 2 factors that should be taken into account when preparing a production budget
Timing - when during the year are products required - are there seasonal fluctuations which will produce uneven demands on production?
Capacity - can existing production facilities cope with expected demand, will new assets be needed?
Labour Cost - does business have the right number of staff with necessary skills, will more staff be needed, will they need training?
Materials - can the right quantity and quality of materials be obtained at the right price
Give a factor that needs to be considered when preparing a purchases budget
there may be a maximum level of stock that can be held
management may require closing stock to be a % of following months sales
