Answers - Budgeting
2. Purposes of a budget:
• Planning
• Allocating resources
• Evaluating/Measuring performance
• Managing performance
3. When resources are over-applied to a given department or job, the department may overspend the costs and hence minimizing the profits. In addition, over-budgeting will cause constraints of the available resources to other departments.
4. When resources are under-valued to a given department or job, the department or project related to that budget may underperform or its product quality may be compromised.
5. Sales budget
6. The two components/sections of a master budget:
• Operating budgets
• Financial budgets
7(a). Operating budgets: Sales budget, cash budget, administration budget, production budgets, cost of goods sold budgets.
(b). Financial budgets: Budgeted balance sheet, budgeted income statement, and budgeted cash flow statements.
8. Flexible budgets are those budgets that are constantly being updated in regards to the latest costs and budgets. Amounts in flexible budgets are closely similar to the actual financial budgets. Static budgets are the budgets that are updated at the end of a given period and thus, any immediate changes in cost are not reflected in the static budgets.
9. Budgeted balance sheet is a balance sheet that is prepared based on cost estimations and not actual costs as incurred. A budgeted balance sheet is prepared and used by the internal management. The balance sheet prepared at the end of the year is based on actual costs that have been incurred and is made for financial reporting purposes with the purpose of providing the outside stakeholders of the company. The amounts on the two balance sheets differ because one is based on estimations while the other is based on actual costs.
10. Padding the budget leads to wrong allocation of resources. Honesty is minimized due to budget budding. Quality may be affected as a result budget padding in one department as the other departments may be affected with limited resources. In cases where departments are rewarded based on performance, when budgets are padded, it leads to departments being rewarded which should not have been rewarded.