Accounting: Budget and Key Factor Essay

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Question 3.1(a)

Explain the purpose and nature of budgeting process

Answer:

1. To co-ordinate the activities of different aspects of an entity, this enables all aspect of the entity to work as a team towards the same goals and objectives.
2. To communicate plans ( data & information) to various departments/managers and other personnel whose duty is implementation.
3. To provide a standard used to measure actual performance.
4. To maximise time and costs, thereby cutting down on wasteful spending.

Question 3.1(b)

Prepare a memo for the marketing manager which provides brief answer to the following queries: What is meant by the term key factor and why is the determination of this key factor so important in the budgetary process?

Answer:

MEMO
To: Marketing Manager
Date: 23rd September, 2013
From: Management Accountant
Subject: Key Factors for 2014 Budget
Key Factor: This is the factor that will set a limit on all the activities in the budget. Normally key factor is sales volume, in a circumstance where there is shortage of skilled staff, then, the availability of skilled labour could be a key factor.
It is important to determine the key factor in order to understand the limitations that confront the company and as a result, be in a position to overcome such limitations and achieve efficiency.

Question 3.1(c)

How can co-ordination be achieved?

Answer:

Identify the key factors and prepare functional budgets within the limitations of the key factor.

Question 3.2(a)

What are the various budgeting methods and briefly emphasise its needs.

Answer:

1. Top – down budgeting
2. Bottom – up budgeting
3. Periodic budgets
4. Rolling Budget
5. Incremental budget
6. Zero Based Budgeting
7. Activity Based Budgeting

Question 3.2(b)

Briefly describe zero-based budgeting, how it might be implemented in the organisation and the benefits that should result.

Answer:

Zero Based budgeting is targeted at eliminating all wasteful expenditure (budget slack). Zero based budgeting is applicable to budgets in government departments where the activities are susceptible to wasteful spending and budget slack.

Implementation

To implement Zero based budgeting, the minimum level of operations in a department or budget centre is identified and given priority over optional additional activities that need to be justified with regards to benefit derived relative to costs. The minimum level of operations are those essential things that the department will have to do, consequently, a budget is prepared for the minimum essentials. As part of its implementation, each additional activity is referred to as a decision package which must have a clearly defined purpose that supports the goals of the firm.

Benefits

1. All activities are continually reviewed and evaluated, to ascertain its usefulness, hence all activities included in the budget must be resourceful.
2. Inefficiency in the utilisation of resources is identified and removed.
3. Wasteful expenditures is identified and removed.
4. Zero based budgeting gives priority to list of activities and expenditures, as a result, activities are prioritised in order of usefulness and importance.

Question 3.2(c)

Rolling Budget

A budget that is continually reviewed and updated is known as a rolling budget or continous budget. Within the rolling budget, the practice of continually updating a budget, involves adding a further period, which can be a month or a quarter and afterwards deduct the earliest period.
Rolling budgets are very useful in circumstances where future activities cannot be predicted or reliably forecasted, consequently, it is most practical for planning to be subject to regular reviews and update in order to achieve full planning period. Rolling Budget is mostly applicable for cash budget, since organisation must ensure an un-interrupted cash flow to satisfy its needs.

Advantages

1.
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