lecture 7a other budgets

Question 1

What is the top down budget?

Answer 1

It is management setting the main budget against the strategy of the business, little discussion about how targets are set

Question 2

What is the bottom-up budget?

Answer 2

Is built up from detail provided by each manager responsible for a budget with targets being agreed by all involved

Question 3

What is a limiting factor?

Answer 3

the constraint that will limit a business’ growth in the following year e.g expected level of sales often determines how a business should start to plan its operations

Question 4

What is a master budget?

Answer 4

the overall business financial plan made up of a budgeted statement of profit or loss, cash budget and budgeted statement of financial position

Question 5

What is a functional budget?

Answer 5

the individual departmental budget e.g sales, production and finance departments

Question 6

What is an incremental budget/ how is it calculated?

Answer 6

calculated by taking the previous year’s actual figures and adjusting for such changes as price inflation

Question 7

What is a zero-based budget?

Answer 7

starts from first principles and calculates every number from scratch

Question 8

What is a variance?

Answer 8

difference between budget and actual sales or expenditure

Question 9

What is a favourable variance?

Answer 9

occurs when sales value is more or expenditure is less than budgeted so profit is higher than budgeted

Question 10

What is an unfavourable budget?

Answer 10

occurs when sales value is less, or expenditure is greater, than budgeted which will result in profit lower than budgeted

Question 11

What is a price variance formula?

Answer 11

(actual price-budget) x actual sales volume

Question 12

What is the volume variance formula?

Answer 12

(actual volume-budgeted) x budgeted selling price

Question 13

What are the 5 functions of a budget?

Answer 13

Planning
Co-ordinating activities (with different departments)
Communicating plans
Motivating managers (absolute/ideal) (attainable/ realistic)
Controlling activities
Evaluating performance of managers

Question 14

What are the 4 steps of the budgeting process?

Answer 14

1. Construct the budget (use limiting factors to start e.g demand/ capacity)
2. Co-ordinate the budget (bring mini budgets together to make master budget)
3. Implement the budget (commit resources)
4. Control and review (measure performance against target)

Question 15

How do you calculate the sales revenue?

Answer 15

Selling Price per Unit × Number of Units Sold

Question 16

What are the 5 important budgets

Answer 16

Sales revenue budget
Production budget
Labour budget
Materials usage budget
Production cost budget

Question 17

What needs to be covered in the production budget?

Answer 17

Required Production = Sales Volume + Desired Closing Stock − Opening Stock

Question 18

What needs to be calculated in the labour budget?

Answer 18

Labour Hours Required = Output Units × Labour Hours per Unit
Labour Cost = Labour Hours × Labour Rate per Hour

Question 19

What needs to be calculated in the material usage budget?

Answer 19

Materials Required = Output Units × Material per Unit
Material Cost = Materials Required × Cost per Unit

Question 20

What needs to be calculated in the production cost budget?

Answer 20

Total Production Cost = Material Cost + Labour Cost + Fixed Overheads

Question 21

What is in production cost budget?

Answer 21

Output
Material cost
Labour cost
Fixed overheads

Question 22

What happens to the fixed overhead?

Answer 22

needs to be divided quarterly

Question 23

What are the 3 performance evaluation styles identified by Hopwood (1972)?

Answer 23

Budget-Constrained (BC)
Profit-Conscious (PC)
Non-Accounting (NA)

Question 24

What characterizes the budget-constrained (BC) style of evaluation?

Answer 24

Evaluation is based strictly on staying within budget short-term; exceeding budget = unfavourable evaluation, regardless of context.

Question 25

What defines the profit-conscious (PC) style?

Answer 25

Budgets are targets, but flexibility is allowed. Overspending may be acceptable if it leads to future profit.

Question 26

What defines the non-accounting (NA) style?

Answer 26

Accounting data is of minor importance in performance evaluation.

Question 27

What is a cost centre?

Answer 27

A part of the business where the main responsibility is controlling costs; highly centralised.

Question 28

What is a profit centre?

Answer 28

A unit responsible for both revenue and cost targets, thus accountable for profits. (can overspend if brings in more revenue)

Question 29

What is an investment centre?

Answer 29

A unit with responsibility over profit and capital investment decisions (e.g. its own long-term budgets).

Question 30

What are benefits & drawbacks of cost centres (CCs)?

Answer 30

✅ Consistency ✅ Avoids maverick behaviour ✅ Accountability ❌ Inflexibility ❌ Senior managers overburdened ❌ Limits middle manager development ❌ Over-reliance on budgets

Question 31

What are benefits & drawbacks of profit centres (PCs)?

Answer 31

✅ Motivation & job satisfaction ❌ Culture change is difficult ❌ Autonomy hard to sell to “Theory X” staff

Question 32

What are benefits & drawbacks of investment centres (ICs)?

Answer 32

✅ Middle managers develop ✅ Faster decision-making ❌ Hard to find skilled, strategic thinkers ❌ Goal alignment issues ❌ Duplication of functions (e.g. R&D)