Budgeting (A Level) flashcards

Topic 2.4: Budgeting

The three named roles of budgeting

Planning, forecasting and control.

Principal budget factor

The factor that limits the level of activity, usually sales demand. Its budget is prepared first.

Planned sales 2,400 units; opening finished goods 300; closing 360. Production?

2,400 + 360 − 300 = 2,460 units.

Production 2,460 units using 3 kg each; opening material 900 kg; closing 1,000 kg. Purchases?

Used 7,380 kg. Purchases 7,380 + 1,000 − 900 = 7,480 kg.

Credit sales: March 30,000, April 36,000. Customers pay 40% the month after sale and 55% two months after; 5% are irrecoverable. May receipts?

36,000 × 40% + 30,000 × 55% = 14,400 + 16,500 = 30,900. The irrecoverable 5% is never received.

Items that never appear in a cash budget

Depreciation, profit or loss on disposal, irrecoverable debts, discounts allowed or received, provisions, accruals and prepayments.

Rent of 7,200 is paid on 1 March for 12 months. Budget for March to May: cash, expense and SOFP figure?

Cash budget: 7,200 paid in March. Budgeted expense: 7,200 × 3/12 = 1,800. Prepayment: 7,200 × 9/12 = 5,400 (current asset).

An old machine with carrying amount 7,000 will be sold for 4,500. What appears in the cash budget?

Only the 4,500 received. The loss of 2,500 goes in the budgeted statement of comprehensive income only.

Flexing a semi-variable cost: power is 3,000 plus 0.80 per machine hour. Flexed cost at 7,500 hours?

3,000 + 7,500 × 0.80 = 9,000. Fixed costs and the fixed part are not flexed.

Participative vs imposed budgets

Participative (bottom-up): involves budget holders, aids motivation, but invites slack. Imposed (top-down): quicker, but less owned by managers.