Question

1. What are the three major objectives of budgeting?
2. Discuss the purpose of the cash budget.
3. Give an example of how the capital expenditures budget affects other operating budgets.
4. If you were in charge of a certain area of operations, how would you address your team/team leaders, if they were consistently going over budget in any given area of their approved budget for operations?

Answer 1

Q1.

Objectives:

No.1) Financial plan: budget is the way of making financial plan; such as the areas of expenses (material purchase, labor payments, etc.), and the extent of earning revenues (such as a plan for selling 20,000 units).

No.2) Allocation of resources: resources (like material, labor, and capital) are limited in a given period of time. If there is no budget such resources may be in scattered used, which may not be beneficial for a firm; therefore, proper allocation is required for better use of resources.

No.3) Cash flow: this is the way of prediction of cash flows in future – such as cash outflow would be higher than inflow in the coming year; this makes arranging funds in advance.

Q2.

This is the budget of inflows and outflows of cash. The purpose is to finding the status of cash position of a firm during a specified time-frame in future. It helps to makes financial plan in constructive way – such as a firm proceeds for working capital arrangement now that will be required for 4^th quarter in the coming year.

Q3.

Expenditure on long-term assets (like plant and machinery) is capital expenditure. The use of such asset requires “Depreciation” to be charged in the operation as an expense; therefore, operating budget is affected by the consideration of depreciation there.

Q4.

The form of addressing is as below:

Hi team,

I am here to give you a short speech about our budget and its variance with actual. Perhaps you know that we are exceeding budget continuously, which gives variance consistently. This is not a healthy financial environment. If you have any trouble maintaining the budget, please let me know; this may help us to revise the budgeted standards; such as direct material price variance is unfavorable always; this happens because actual price of material is higher than budgeted material price; would you please tell me why is it? Don’t you get discount in bulk purchasing? If this is so we may think about cancelling the existing supplier and appointing some other supplier.