Budgets (Cambridge International A-Level Accounting)

Spec point — what is meant by a master budget the effect of limiting factors on the preparation of budgets

Budgets

What is a budget?

• This is a future financial plan that helps businesses make decisions

• There are two types of budgets:

  • Incremental budgeting is based on using previous budgets and adjusting it accordingly
  • Zero-based budgeting is starting the budgeting without any prior information

What are the limiting factors when preparing budgets?

• Depending on what the limiting factors are, will depend on what order the different budgets are made:

  • Shortage of material

    • This will limit production and purchases

  • Shortage of labour

    • This will limit production and labour

  • Limited demand

    • This will limit sales and production

  • Limited cash

    • This will impact the ability to buy materials and pay workers
    • Will have an impact on cash budget too

  • Shortage of space

    • A limited amount of space will limit production

What are the different budgets?

• There are 8 budgets and 2 master budgets that help the business to plan and make decisions

The different budgets

• Master budgets

  • Budgeted statement of profit and loss

    • Forecasted income and expenditure
    • Same layout as the historical statement of profit and loss

  • Budgeted statement of financial position

    • Forecasted assets, liabilities and capital
    • Same layout as the historical statement of financial position

• Other budgets

  • Sales

    • Shows revenue from sales and the volume of sales

  • Production

    • Shows the number of units to produce for a particular time period

  • Purchases

    • Shows the cost of purchasing inventory or raw materials and the volume needed

  • Labour

    • Shows the labour costs and hours expected for a particular time period

  • Expenditure

    • Shows other cash expenses that need forecasting which can be incorporated in the cash budget

  • Trade receivables

    • Shows the amount of money expected from credit customers and is linked to the sales budget

  • Trade payables

    • Shows the amount of money expected to pay credit suppliers and is linked to the purchase budget

  • Cash

    • Shows the money coming in and out of the business for a particular period of time

Exam Hint Use the 'other' budgets to help compile the master budgets.

Advantages & disadvantages of budgetary control

Spec point — the advantages and disadvantages of a budgetary control system to an organisation the advantages and disadvantages of preparing budgets using spreadsheets

Advantages & disadvantages of budgetary control

What are the advantages of budgetary control?

• Can be a motivating factor for staff, especially if bonuses are paid on meeting targets
• Can help identify departments that need improving and help managers with decision making
• Allows greater access to external sources of finance such as bank loans
• Allows the business to plan for expansion and growth

What are the disadvantages of budgetary control?

• Can be time-consuming to put together and take managers away from their daily tasks
• **External factors **are often ignored when budgeting
• Managers may create** inefficiencies** in the budget to give them some 'budgetary slack'
• An expert is needed to prepare the budgets, which can be costly

What are the advantages and disadvantages of preparing budgets using spreadsheets?