Question

1. How does budgeting provide important information to managers and operating personnel?

2. Explain at least three times of budgets.

3. Explain how a flexible budget is used?

Answer 1

Answer 1

1) Promote coordination and communication among organization units and activities

When the sales manager shares sales projections with the production manager, the production manager can plan and budget to produce the inventory that is to be sold.

2) Measuring Performance

Budgets makes it possible for managers to measure actual performance against planned performance

3) Motivating Managers and employees

A challenging budget improves employee performance because no one wants to fail, and falling short of achieving the budgeted numbers is perceived as failure.

Answer 2

            Three types of budgets

1) Zero Based Budgeting

Zero based budget is prepared without any reference to, or use of the current period’s budget or the likely operating results for the current period. Every planned activity must be justified with a cost benefit analysis

2) Continuous (Rolling) Budgets

A continuous budget also called a rolling budget is one that is prepared for a certain period of time ahead of the present. For example, a one-year continuous budget would be prepared at the end of evey month for the next 12 months

3) Project Budgeting

As the name suggest a project budget is a budget for a specific project. As such the time frame of the budget may be very short or longer term depend on the length of the project.

Answer 3

A flexible budget is a budget that is prepared after the actual level of activity is known. A flexible budget for a production department will consist of the budgeted variable amounts per unit adjusted to the actual volume of units produced.

The flexible budget is prepared for the actual level of activity using all of the standard variable cost per unit along with the standard total fixed cost as determined at the beginning of the year