Budgeting flashcards

Topic 9: Budgeting

Principal budget factor

The factor that limits activity (often sales demand). Its budget is prepared first because it determines every other budget.

Order of budget preparation

Sales → production → materials usage and purchases → labour → cash budget → budgeted income statement → budgeted statement of financial position.

Sales 800 units; opening finished goods 120; closing 150. Production?

800 + 150 − 120 = 830 units.

Production 1,000 units at 3 kg each; opening raw materials 400 kg; closing 550 kg. Purchases?

Usage 3,000 kg. Purchases 3,000 + 550 − 400 = 3,150 kg.

20% of sales are for cash; credit customers pay half one month after and half two months after. Sales: Feb £22,000, Mar £25,000, Apr £28,000. April receipts?

20% × 28,000 + 80% × 25,000 × 50% + 80% × 22,000 × 50% = 5,600 + 10,000 + 8,800 = £24,400.

March credit sales £10,000; 70% pay in April and take a 2% discount. April receipt from March sales?

10,000 × 70% × 98% = £6,860.

Incremental budgeting vs zero-based budgeting

Incremental: last period's figures adjusted; low cost and time, but waste is carried forward; suits stable costs. ZBB: every activity justified from zero; high cost and time, but waste is challenged; suits discretionary costs.

Budget: 1,000 units, variable cost £5, fixed cost £3,000. Actual: 1,200 units costing £9,400. True cost variance?

Flexed cost 1,200 × 5 + 3,000 = £9,000, so the variance is £400 adverse. The other £1,000 is the cost of the extra 200 units.

Cash budget vs budgeted income statement: depreciation, a loan received, drawings

Depreciation: income statement only. Loan received, asset bought, drawings: cash budget only (loan interest goes in the income statement).

Opening overdraft £2,000; receipts £15,000; payments £14,200. Closing balance?

−2,000 + 15,000 − 14,200 = £1,200 overdrawn.