# Management Accounting: Budgeting

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• Created by: Naana
• Created on: 10-11-19 20:22
Define a trend
The general movement of a time series over a long period of time
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Define seasonal variation
The regular short-term movement of away from the trend
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Define cyclical variation
A recurring pattern over a longer period of time
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Define random variation
An irregular variation due to rare or chance occurrences
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Define a time series
A series of figures or values (income or expenses) recorded over a period of time
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What is time series analysis?
A method of calculating the trend and other relevant figures from a time series
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Define budget
A formalised, numerical plan of action for all areas of the business in the forthcoming period
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Define forecast
An estimate of what may happen in the future based upon historical data and knowledge of future changes
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How do you calculate a time series forecast?
TS=TREND +SEASONAL VARIATIONS
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Define index
A measure over time of the average changes in the values, prices or quantities of a group of items
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Define interpolation
Forecasting data within the historical data range
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Define extrapolation
Forecasting data outside of the historical data range
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What are the general limitations of forecasting?
1) If the forecast is based on limited data, the forecast will have limited use. 2) The further into the future the forecast looks, the more unreliable it will be. 3) Often based on the assumption that current conditions will continue into the future
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What is a quota sampling?
The number of samples required from each group is determined and then a non-random sample is taken to provide the required numbers.
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What is random sampling?
All items in the population are known. Random numbers are then used to select a sample from the population
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What is stratified sampling?
A type of random sampling which divides the population into groups and then selects a random sample from each group based on the proportionate size of the group.
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What is a standard cost?
An estimated unit cost, prepared in advance and a calculation of how much costs should be under specified working conditions
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What are ideal standard?
Standard costs based on ideal working conditions. There is no allowance for wastage, inefficiencies or idle time
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What are attainable standards?
Standards which can be met if operations are carried out efficiently. The allow for small amounts of normal wastage and inefficiency, and are viewed as motivational to managers
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What are basic standards?
Historic standard costs which are likely outdated, and result in large variances when compared with actual costs
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What is a key budget factor?
The element or resource of the business that is likely to place limitations on its activities usually sales
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What are cash budgets?
A method of determining the expected net cash flow for a future period & the expected cash balance at the end of that future period
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What are long term solutions to a shortage of materials?
Seeking an alternative supplier, finding alternative material, making an alternative product, buying in finished good for resale
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What are short term solutions to a shortage of materials?
Using materials + finished good held in inventory, rescheduling purchases to ensure the maximum use of available materials
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What are long term solutions to a shortage of labour?
Improving labour efficiency through training
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What are short term solutions to a shortage of labour?
Increase the overtime worked, use sub-contractors, use up finished goods held in inventory, buy in finished goods inventory
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What are long term solutions to a shortage of capacity?
Invest in non-current assets, increase work shifts, increase the number of workers
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What are short term solutions to a shortage of capacity?
Build up inventories in advance, staff working additional shifts, buying in finished goods, renting equipment or premises
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What is a limiting factor?
A factor of production /sales that limits the amount that can be produced or sold
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What is a contingency budget?
An alternative budget that is set to account for uncertainty in a future period e.g sales activity
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What is a fixed budget?
A budget which doesn’t change as the volume of activity changes. It is set in advance and acts as a plan of action for the organisation.
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What is a flexed budget?
A budget prepared for the actual activity level for the period
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Suggest reasons for an adverse material price variance
Unexpected price increase from suppliers, loss of bulk buying discount, purchase of a higher grade of materials, weakened sterling exchange rate
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Suggest reasons for an adverse material usage variance
Greater wastage due to a lower grade of material/labour, problems with machinery
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Suggest reasons for an adverse labour rate variance
Unexpected increase in employees pay rate, use of a higher grade of labour than anticipated
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Suggest reasons for an adverse labour hours variance
Use of a less skilled grade of labour, lower grade of material, increase in ideal time, poor supervision workers, machinery problems
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Suggest reasons for a favourable material price variance
Better price negotiated with supplier, negotiated bulk purchase discount, purchase of lower grade materials, improvement to sterling exchange rate
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Suggest reasons for a favourable material usage variance
Higher grade of material/labour, new machinery with greater efficiency
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Suggest reasons for a favourable labour rate variance
Use of a lower grade of labour than budgeted for
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Suggest reasons for a favourable labour hours variance
Use of a more skilled grade of labour, higher grade of material, less idle time than anticipated, more efficient machinery
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What is the budget committee?
Committee of senior executives from all areas of the business who oversee the preparation of budgets. They are responsible for co-ordinating administering, reviewing and authorising all the individual budgets and master budget.
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What the budget accountant?
An accountant who helps the budget committee in the preparation of budget They liaise with both the budget committee and the budget holder to produce a detailed budget of costs and revenue
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What is the budget manual?
A set of instructions detailing how the budget should be prepared. Includes names of budget holders, the timescale for the production of each budget, the procedures for preparing each budget, the format of the budget
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Who are Budget holders?
Manager responsible for preparing a resource budget
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What is the master budget?
The final overall budget for all areas of the business. Set out in the form of a budgeted SPL, budgeted SOFP, and cash budget
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How are budgets prepared from start to master budget?
Firstly, the budget is set for the key budget factor. Then the production budget is set followed by the other resource budgets. Budget is prepared by the budget holder with the assistance of the budget accountant. Draft budget is then submitted to th
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What are the 4 uses of budgetary control?
Planning-revenue and cost, Co-ordinating- activities of different departments to work towards the same goals, authorisation- allocating responsibility to departmental managers, cost control- comparing actual costs to budgeted cost
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What steps can be taken to make managers motivated to meet budgets?
Assessing managers on items that are within their control, bottom up budgeting- they will be involved in the planning process so more motivated to achieve budget, attainable yet challenging budget, performance related pay as an incentive
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What is top-down budgeting?
When the budget is set and imposed by senior management
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What are the advantages of top down budgeting?
Strategic plans can be incorporated to all the budgets, coordinating between all the budgets, budgets are produced more quickly
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What are the disadvantages of top down budgeting?
Manager may be demotivated to meet targets set by someone else, managers detailed knowledge of the particular business area is ignored, managers may resent other departments who are allocated a greater proportional share of the budget
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What is bottom-up budgeting?
When operational managers have a degree of input into the budget
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What are the advantages of bottom-up budgeting?
Budgets based on the detailed knowledge of managers, increase motivation of managers to achieve budget, increased commitment to the organisations strategic plan from the manager
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What are the disadvantages of bottom-up budgeting?
Outcome of negotiations with the budget committee may cause dissatisfaction, budgeting process takes more time and involves more people, possibility of budgetary slack being introduced, may be lack of coordination between resource budgets
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What needs to be in place for performance related pay to successfully motivate managers?
Mangers must know the strategic plan and see how their budget works towards the strategic goal, budgets must be challenging yet achievable, managers must have control over the costs being compared the budget, bonus should be great enough to offer an
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What is budgetary slack?
Extra amount of cost built into the budget by managers in order to make targets easier to meet. Overestimating costs and underestimating sales for a favourable cost variance
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What is goal congruence?
Where the aims of an individual function/department are consistent with the overall aims of the organisation
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What is incremental budgeting?
Where the previous budget is adjusted for changes in prices and activity levels
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What is zero based budgeting?
Where the budget for each cost centre is looked at from scratch each period. Each item of activity which causes cost must be justified after compiling a decision package, or a cheaper alternative found.
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What is programme based budgeting?
Where the work of an organisation is split into different programmes designed to meet the organisational objectives, and funds are allocated to programmes
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What is activity-based budgeting?
Method of setting the budget based on the usage of cost drivers throughout the organisation
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What is priority-based budgeting?
Similar to zero based budgeting, but activities are re-evaluated when budgets are set
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What is rolling budgets?
A budget that is constantly updated to cover the next 12-month period. At the end of quarter, the next quarter is added to the budget. The budget for the next quarter is set out in detail.
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## Other cards in this set

### Card 2

#### Front

Define seasonal variation

#### Back

The regular short-term movement of away from the trend

### Card 3

#### Front

Define cyclical variation

### Card 4

#### Front

Define random variation

### Card 5

#### Front

Define a time series