Chapter 4 AMAC

Formula for sales revenue budget

Sales revenue budget= estimated unit sales x estimated selling price per unit

What are the two factors that will affect the amount of production required?

• Any changes in inventory levels of finished goods that are anticipated

• The level of defective finished goods that are forecast

Formula for production quantity with and without defective output

production quantity= Sales quantity - OP + CL required

production quantity= Sales quantity - OP + CL required + anticipated defective units

Formula for materials usage budget

Materials usage= Quantity required to meet production + wasted material

Formula for materials purchases budget

Materials Purchases= materials usage - OP + CL

Formula for cost of goods sold

cost of goods sold= OP + Cost of production - CL

Steps for planning and agreeing draft budgets

1) Draft budget should be planned and agreed with all parties.

2) Final version should be agreed by both the senior management and the manager of the responsibility centre concerned.

3) Managers should check and reconcile figures of the budget to ensure their accuracy and consistency.

4) The budget must then be recalculated

chapter 4 question advice: what to include for written task

You may be presented with a budget that has already been prepared alongside some information that was used to prepare it. You may then be asked to explain the assumptions that were made when the budget was prepared. Consider the following:

• What the assumption is

• Why it has been made

• How it has impacted the budget that is being presented

• Convert absolute numbers to percentage increases/decreases

• Calculating standard cost of material per kg or labour per hour, production cost per unit or selling price per unit (per unit costs)

• Considering budget hierarchy (e.g. has the number of production units budgeted increased due to an increase in sales volume forecast? Is this in direct proportion? If not why?

Define fixed budgets

Budgets are set in advance of a period and the purpose is to provide a single achievable target for the entire organisation to work towards

Define flexible budgets

Budgets by which recognising different cost behaviours are designed to change as a volume of activity changes

Define flexed budgets

Budget that are prepared at the actual activity level that was achieved during the period in order to show what the standard cost should have been at that particular activity

What are the four methods of dealing with uncertainty?

• Planning models (e.g. Sensitivity Analysis)

• Regular re-forecasting

• Re-budgeting

• Rolling budgets

Describe two types of unethical behaviour that can arise from budgeting

• Managers may increase budgets for no reason which can lead to budgetary slack as well as leaving a good year end performance impression

• Managers may spend the full budget even if not needed

A manufacturing firm is very busy and the direct labour force are working overtime. The amount of overtime premium contained in their wages would normally be classed as?

• Part of prime cost

• Factory overheads

• Direct labour costs

• Administrative overheads

Factory overheads