Budgeting ,standard Variance Analysis Flashcards
(13 cards)
What is budgeting, and what is its overall purpose?
financial planning process that involves preparing detailed projections of revenues and expenditures over a future period.
Purpose:
To set targets and allocate resources effectively.
To serve as a control tool for monitoring performance against planned objectives.
To facilitate decision-making and strategic planning.
What are some advantages and disadvantages of budgeting?
A:
Advantages:
Enhances planning and coordination across departments.
Provides a benchmark for measuring performance and controlling costs.
Encourages proactive management and resource optimization.
Improves communication of goals and expectations.
Disadvantages:
Can be time-consuming and costly to prepare.
May lead to inflexibility if circumstances change.
Potential for budgetary slack (intentional underperformance).
Overemphasis on meeting budgets can stifle innovation.
What are the primary stages in the budgeting process
Stages:
Setting objectives and strategic goals.
Collecting data and forecasting revenues/expenses.
Preparing various departmental/functional budgets.
Consolidating into a master budget.
Implementing, monitoring, and periodically reviewing performance against budget.
What are limiting factors in budgeting?
A:
Limited resources (financial, human, time).
Uncertainty in market conditions and external variables.
Internal constraints such as organizational structure and resistance to change.
Inadequate or inaccurate data impacting forecasts.
How do different types of budgets differ in preparation, merits, and demerits?
A:
Functional Budgets:
Preparation: Detailed budgets for each area (sales, production, administration).
Merits: Specific control and accountability at departmental levels.
Demerits: Can lead to siloed information and coordination issues.
Cash Budget:
Preparation: Forecasts cash inflows and outflows over a set period.
Merits: Critical for liquidity management and avoiding cash shortfalls.
Demerits: Highly sensitive to timing inaccuracies.
Flexible vs. Fixed Budgets:
Flexible Budgets: Adjust to changes in activity levels.
Merits: More adaptable to actual conditions.
Demerits: More complex to prepare and monitor.
Fixed Budgets: Remain constant regardless of activity changes; simpler but rigid.
Master Budget:
Preparation: A consolidated budget covering all functional areas.
Merits: Provides an overall view of organizational finances.
Demerits: Complexity in integration and coordination.
Basic vs. Current Budgets:
Basic Budgets: Prepared at the start of a period and remain unaltered.
Current Budgets: Updated periodically to reflect new information.
Short-Term vs. Long-Term Budgets:
Short-Term: Focus on immediate operations (typically one year or less).
Long-Term: Set strategic direction beyond one year; less detailed but crucial for planning.
What are some alternative approaches to budgeting, and what are their merits and demerits?
Zero-Based Budgeting:
Merits: Requires justification of every expense; can eliminate inefficiencies.
Demerits: Time-intensive and may require extensive justification.
Activity-Based Budgeting:
Merits: Focuses on cost drivers and improves cost control; aligns resources with activities.
Demerits: Requires detailed activity analysis; can be complex to implement.
Rolling Budgeting (Continuous Budgeting):
Merits: Regularly updated; adapts quickly to changes.
Demerits: Constant revision may cause planning fatigue; can be administratively burdensome.
Beyond Budgeting:
Merits: Emphasizes decentralization and adaptability over rigid planning; encourages innovation.
Demerits: Lacks standardization; may be challenging in highly regulated environments.
Incremental Budgeting:
Merits: Simple and easy to implement by adjusting previous budgets.
Demerits: Can perpetuate past inefficiencies; does not encourage a critical review of expenses.
How do organizational and behavioral factors influence budgeting
Motivation:
Budget targets can motivate employees if they are realistic and attainable.
Excessively tight targets may demotivate and lead to unethical behavior (e.g., budgetary slack).
Managerial Incentive Schemes:
Incentive systems can be tied to budget performance; effective schemes promote accountability and performance.
Poorly designed incentives may lead to short-term thinking.
Participative Budgeting:
Advantages: Enhances commitment and better insights from lower-level managers.
Disadvantages: Can be time-consuming; potential for conflict if targets are unrealistic.
Top-Down vs. Bottom-Up Budgeting:
Top-Down: Senior management sets budgets; may lack buy-in from lower levels.
Bottom-Up: Budgets developed by departments; more realistic but can lead to over-optimism.
What is budgetary control and how is it applied?
Meaning:
The process of comparing actual performance with budgeted targets and initiating corrective actions when variances arise.
Operation:
Regularly monitor performance through variance analysis (flexed and fixed budgets).
Identify controllable vs. uncontrollable costs.
Utilize responsibility accounting to hold managers accountable.
Prepare control reports that include performance ratios, capacity, and efficiency measures.
What is standard costing and how does it compare with budgetary control?
A:
Meaning:
A cost control technique where predetermined (standard) costs are compared with actual costs.
Comparison:
Standard Costs vs. Budgeted Costs: Standard costs are benchmarks for individual cost elements; budgeted costs are overall expected costs for a period.
Standard costing is often used to control and evaluate performance on a detailed level.
List the advantages and disadvantages of standard costing.
Advantages:
Provides clear cost control benchmarks.
Facilitates performance evaluation and variance analysis.
Helps identify inefficiencies in production.
Aids in pricing decisions and cost management strategies.
Disadvantages:
Can be inflexible if standards are not regularly updated.
May become obsolete in rapidly changing environments.
Overemphasis on variances may discourage innovation.
Requires accurate and realistic standard setting to be effective.
What is variance analysis and how is it performed?
Meaning:
The process of comparing standard costs with actual costs to determine deviations (variances).
Determination:
Compute variances for direct materials, direct labour, overheads, and sales.
Analyze both favourable and unfavourable variances to assess performance.
Responsibility Centres:
Assign variances to appropriate managers or departments for accountability.
What are common causes of variances and what control actions may be taken?
Causes:
Inefficiencies in production processes.
Fluctuations in price or material usage.
Operational delays or unforeseen events.
Control Actions:
Investigate significant variances before taking corrective measures.
Consider factors such as market changes or production disruptions.
Implement process improvements to realign actual costs with standards
