Budgeting Revision

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What is the formula for Overhead Absorption rate?
Production Overhead/Activity Level
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What is a top-down approach to Budgeting?
Involves senior level management setting the budget with little or no involvement of lower level staff. The budgets are then passed down to lower level staff who are expected to achieve them.
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Give advantages of top-down budgeting?
- Gives senior managers greater control.
-Senior managers should be best placed to make the decisions.
-Senior managers have more skills and knowledge rather than operational managers.
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Give disadvantages of top-down budgeting?
-Senior managers lack local knowledge so budgets may not be relevant.
-Targets may be unrealistic or unachievable.
-It is poor use of senior managements time.
-De-motivating to staff if budgets are unachieveable.
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What is bottom-up budgeting?
A bottom-up approach involves each department setting its own budgets by identifying what they think they can achieve.
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Give advantages of bottom-up budgeting?
-Operational management are likely to have better local knowledge.
-Frees up time for senior management.
-More motivating for staff.
-Helps build skills as managers for lower level managers.
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Give disadvantages of bottom-up budgeting?
-Very time consuming as many managers in different departments will need to be involved.
-May lack the required skills.
-Conflicting views on what should be in the budget.
-Too easy to achieve- 'Budgetary Slack'
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What is incremental Budgeting?
This is a system where the budget for the forthcoming period is calculated by taking the current year budget and adjusting for changes such as anticipated inflation and market growth or other factors.
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Give advantages of incremental budgeting?
- The budget is stable and changes are gradual over time which will be easier for staff to cope with.
- The system is relatively simple to operate and easy to understand,
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Give disadvantages of incremental budgeting?
-It assumes activities and methods of working will continue in the same way from year to year.
-There is no incentive to reduce costs in the budget.
-Encourages departments to spend the full amount of their cost budgets.
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What is zero based budgeting?
It is a budget that starts at zero every year and takes nothing for granted. It requires managers to justify every item of expenditure.
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Give advantages of zero based budgeting?
-Results in more efficient allocation of resources.
- Drives managers to find cost effective ways to improve operations and identifies opportunities for saving money.
-Increased staff motivation by providing greater involvement and responsibility.
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Give disadvantages of zero based budgeting?
-Very time consuming
-Managers may become de-motivated at being forced to justify every detail related to every expenditure.
-Challenging to undertake.
-Difficult to administer and may affect communication.
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What is a rolling budget?
Rolling budgets are a way of amending the budget each month to account for developing circumstances in the market place. E.G. good for covid.
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Give advantages of rolling budgets?
- In times of uncertainty around resource prices and demand levels, it provides up to date budgetary information.
-Encourages staff to look at changing internal and external variables.
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Give disadvantages of rolling budgets?
- Involves much time and effort
-Continually changing the budget can lead to de-motivation of staff as they dont know what they are aiming for.
-Can be unclear what we are comparing performance to.
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What is activity based budgeting?
Looks at what drives costs to determine which costs to account for.
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Give advantages of activity based budgeting?
-Focuses management attention on the true drivers behind costs.
-Budgets are likely to be more accurate because we are considering the activities that lead to the costs increasing.
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Give disadvantages of activity based budgeting?
-Time consuming
-The concept is not easily understood by managers.
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What is priority based budgeting?
It is a modification of the zero-based approach. It focuses on organisational priorities and allocates growth and savings in the budgets accordingly.
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What is the formula for time series?
Time series= Trend + Seasonal Variation
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What re the limitations of forecasting the trend using past data?
-Predicting outside of data range is less accurate.
- It assumes a linear relationship between the two variables which is unlikely in the real worls.
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What is a census?
It looks at every single item in a population?
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Give an advantage of using a census?
You will gain comprehensive information about the population.
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Give a disadvantage of using a census?
This approach will be hugely time consuming and is rarely used other than for very small populations of data.
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What does a master budget comprise of?
Budgeted income statement, budgeted statement of financial position and budgeted cash flow statement only.
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Give reasons for producing fixed budgets?
-Fixed budgets help businesses to secure the necessary resources to achieve production targets.
- Fixed budgets act as motivating targets for staff.
- Fixed budgets can be used to communicate expected results to owners
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Give reasons for producing flexed budgets?
- Flexed budgets give a more meaningful comparison against actual results as they are based on the same volume figures.
- Flexed budgets allow calculation of useful variances.
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What are variable costs?
Variable costs will vary with the level of activity. The more units that are produced, the higher the total costs will be. It is assumed that the cost per unit remains constant regardless of the level of production. Example- direct materials.
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What are fixed costs?
Fixed costs do not change with the level of activity.
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What is stratified random sampling?
In a stratified sample the sampling frame is divided into non-overlapping groups. For example we could have groups for different geographical areas, different age groups or different genders. A random sample is taken from each group.
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What is cluster (non-random sampling)?
Cluster sampling divides the population into groups or clusters. A number of clusters are selected randomly to represent the population and then all units within selected clusters are included in the sample.
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What is systematic sampling?
This is where every nth item in the sampling frame is taken for the sample.
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What is multi stage (non-random) sampling?
Multi stage sampling is similar to cluster sampling but involves selecting a sample within each chosen cluster rather than including all units in the cluster.
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What is a quota?
A sample of a certain number of items is taken.
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Card 2

Front

What is a top-down approach to Budgeting?

Back

Involves senior level management setting the budget with little or no involvement of lower level staff. The budgets are then passed down to lower level staff who are expected to achieve them.

Card 3

Front

Give advantages of top-down budgeting?

Back

Preview of the front of card 3

Card 4

Front

Give disadvantages of top-down budgeting?

Back

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Card 5

Front

What is bottom-up budgeting?

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