Budgeting process Flashcards
(25 cards)
why need budget?
to plan for the aquisition and use of resources, focused on planning and control to achieve organizational goals
purpose of budgets?
- planning (goal setting)
- control (ensuring we move towards our goals)
useful for?
- allocation of resources
- forces managers to think long term
- co-ordination of activities of the different departments
- evaluation of management’s performance
prep of productions using historical data?
budgets:
- focused on the future
- aimed at achieving a predetermined goal
- expressed in quantifiable terms
projection techniques?
- high-low method
- least-squares method
budgetary functions?
- planning annual operations
- coordinating activities of various parts of organisation & ensuring in harmony (& allocating resources)
- communicating plans to various responsibility centre managers
- motivating managers to strive to achieve organisational goals
- controlling activites
- evaluating the performance of managers
standards?
predetermined target costs per unit under efficient operations
consists of standard price and standard quantity
Standards used for?
- decision making (future cost)
- planning (budgets)
- performance evaluations and control (comparison against actual)
- inventory valuations (valued at standard cost)
standard costing system
budgets are compiled based on?
- budgeted sales volumes & standards sales prices
- budgeted production volumes & standard costs
operating budgets?
- prepared for a single financial period, usually a year or less
- eg quarterly, monthly and dialy budgets
operating budgets include?
- sales & revenue budget
- production budget in units (budget for direct materials, direct labour budget, manufacturing overhea budget)
- non-manufacturing budget
steps for operating budget?
- sales/ income budget (standard = budget)
- production budget in units
- (a) direct raw material budgets, (b) budget for direct material: purchase budget
- direct labour budget
- manufacturing overhead budget
- non-manufacturing cost budget
purpose of cash budgets?
- to determine if entity has sufficinet cash to carry out its ordinary operations and/ or has too much cash that is left in unproductive capacity
- budgeted cash inflows less budgeted cash outflows
- only cash flow items are reflected in a cash budget - in the period in which the transaction occurs
cash budgets
what does it show?
- insufficient cash available (cash deficit): threaten survival of business
- excess cash (cash surplus): employed in a more profitable manner
short term cash deficit?
obtian cash by:
- arrange with suppliers to pay them later
- encourage debtors to pay sooner by offering early settlement discount
- arrange bank overdraft
- reduce inventory levels
- postpone dividend payments
long-term cash deficit?
obtain cash by:
- raising long-term finance
- sell unused assets
- issue equity
short-term cash surplus?
- pay creditors early
- grant credit to customers
- invest in interest-bearing short term securities
long-term cash surplus
- invest in capital equipment
- expand business operations
- diversify into other business areas
fixed (static) budgets?
- not affected by changes in activity levels
- is drawn up for a specific activity level
- fails as a control measure when actual activity levels vary from budgeted activity levels
- = original budget
flexible (variable) budgets?
- designed to change according to changes in activity levels
- based on variable costs per unit
- easily be adjusted when actual activity level differ from budgeted activity levels
- more sophisticated and useful that static budgets
- performance evaluation tool, cannot be prepared before the end of the period
fixed & flexible budgets?
- prepare the flexible budget if actual activity and fixed budget activity differ
- flexible budget = fixed budget adjusted to actual activity level
Why might a fixed budget fail as a control measure?
Because it doesn’t adjust for actual activity levels, making performance comparisons inaccurate.
How is a flexible budget prepared?
By applying standard costs and revenues to the actual activity level (units produced/sold).
What components are included in a budgeted income statement?
- Sales revenue
- Cost of sales (opening stock + production costs − closing stock)
- Gross profit
- Other expenses (R&D, marketing, admin, etc.)
- Net profit
