Question

A The key characteristics of an effective budget system. B The steps to prepare a master budget. C How a flexible budget will assist management in evaluating performance at the end of an accounting period. D)Demonstrates how budgeting assists Ford’s management in making critical long-term and short-term decisions. E) Discusses the impact of Ford’s decisions to eliminate cars.

Answer 1

1) The key characteristics of an effective budget system includes well-Planned, realistic, flexible, and clearly communicated. A budget must begin with the short and long-term plans and targets of the enterprise; and should inspire and motivate and all the connected people in the enterprise to work toward attaining the goals of the enterprise. A flexible budget allows an enterprise in going ahead with plans which are strategically significant to the enterprise. Moreover, to be effective, the budget must convey a sense of ownership to the employees in the enterprise who are given the responsibility of budget implementation.

2) The main steps to prepare the master budget are listed below:

• Formation of a budget committee

• Long-term plan review

• Identification of the principal budget factor and preparing it's the budget

• Sales budget preparation

• Preparing the finished goods stock budget as well as production budget

• Preparing the resource budget for production

• Material usage budget, based on the production budget, displaying quantities and cost for each type of material utilized

• Machine utilization budget, displaying operating hours needed on each machine

• Preparing wages budget, for all types of labor

• Preparing overhead cost budgets for administration, maintenance, distribution and others

• Preparing the raw materials stock budget that depend on the central plant’s requirement for stock

• Preparing the raw materials purchases budget in value and quantities for each material type purchased. This budget is completed with the adjustment of the budgeted materials usage for the raw materials change in the stock budget

• Prepare creditors, debtors, and cash budgets.

• Co-ordinating and reviewing budgets, a task that is completed with regular budget committee meetings. A review may indicate that fee budgets requires modification to be compatible with others

• Preparing the master budget, as a summary of all other budgets, and submission of it to the company's board of directors for approving.

  3) A flexible budget assists management to carry out essential unplanned and unforeseen large maintenance works which can be beneficial the enterprise. Because the flexible budget restructures itself based on the levels of activity, it is effective tool for evaluating the performance of managers - the budget must closely align to expectations at any number of activity levels. It also acts as planning tool for management, who can use it to model the likely financial results at several different activity levels.