Chapter 7: Preparing Budgets

Question 1

What is a budget?

Answer 1

Quantative or financial plan relating to the future.

Question 2

Why do we budget?

Answer 2

Planning
Control
Communication
Co-ordination
Evaluation
Motivation

Question 3

How do we calculate the materials usage budget?

Answer 3

Production budget x standard material usage per unit

Question 4

What is a cash budget?

Answer 4

Forecast of cash receipts and payments based on predictions of sales and cost of sales and the timings of the cash flows relating to these items

Question 5

What are cash budgets used for?

Answer 5

Assess and integrate operating budgets
Plan for cash shortages and surpluses
Compare with actual spending

Question 6

How do we calculate cash receipts?

Answer 6

Sales + brought forward receivables - carried forward receivables

Question 7

How do we calculate cash payments?

Answer 7

Purchases + brought forward payables - carried forward payables

Question 8

Why is a sensitivity analysis useful?

Answer 8

Can identify which assumptions have the greatest impact on the budget

Question 9

What is the downside with a sensitivity analysis?

Answer 9

only one assumption can be changed at a time

Question 10

What is a stress test?

Answer 10

examines how a budget would perform or function under severe or unexpected pressure

Question 11

What are some internal sources of data?

Answer 11

Accounting system
Manager feedback

Question 12

What are some external sources of data?

Answer 12

Customer and supplier questionnaires and discussions
Government announcements and data
Media announcements

Question 13

What is big data?

Answer 13

Used to refer to the large volume of data, both structured and unstructured, that is available to organisations on a day-to-day basis.

Question 14

What are some sources of big data?

Answer 14

Media (including social media)
The web
Machine generated
Databases

Question 15

What are the benefits of using big data?

Answer 15

Information is more up to date than that from traditional sources
More timely information means the organisation can make better and quicker decisions
Customers changing needs are better understood
Budget stress testing becomes easier as there are more indicators of potential stress

Question 16

What are the problems with using big data?

Answer 16

Volume - often too much data
Velocity - data will change too quickly
Variety - no consistent way in which data is presented
Veracity - can be difficult to gauge the trustworthiness of the data

Question 17

What is incremental budgeting?

Answer 17

Adjust the previous years budget for inflation and cost increases

Question 18

What are the benefits on incremental budgeting?

Answer 18

Easy
Cheap
Suitable in stable environments

Question 19

What are the problems with incremental budgeting?

Answer 19

Ignores environmental changes
Builds on inefficiencies
Too easy
Unjustified Changes
Encourages over-spending

Question 20

What is zero based budgeting (ZBB)?

Answer 20

Start from scratch each year

Question 21

What are the benefits of zero based budgeting?

Answer 21

Improved accuracy
Improved utilisation
Justified changes
Better recognition of environmental changes
Improved performance measures
Best suited to changing environment

Question 22

What are the problems with zero based budgeting?

Answer 22

Expensive
Difficult
Time consuming
Encourages short-termism
Requires training

Question 23

What is activity based budgeting (ABB)?

Answer 23

Budgets are set for each activity using cost determined by ABC

Question 24

What are the benefits of activity based budgeting?

Answer 24

Best when overheads are significant
Very useful in TQM environment
Cost control and cost cutting are easier

Question 25

What are the problems with activity based budgeting?

Answer 25

Expensive
Only useful if using ABC