Summary — What This Chapter Covers
- Budgetary control: set budgets for each manager, compare actual results with the budget, investigate variances and act.
- Order of preparation: sales → production → purchases and labour → trade receivables and payables → cash → budgeted statement of profit or loss and statement of financial position (the master budget).
- Production = sales + closing inventory − opening inventory. Purchases = materials used + closing inventory − opening inventory.
- The cash budget records cash only, in the month it moves: no depreciation, and credit sales are received in the month the customer pays.
- A limiting factor (material, labour, machine time, demand) caps output, so the budget starts from it.
- A flexible budget restates the budget at the actual level of activity, so variances compare like with like.
- Budgets affect people: participation, realistic targets and fair incentives motivate; imposed or impossible targets and budget slack do not.
1. Budgetary Control, Spreadsheets and the Master Budget
Syllabus 4.3.1 · A Level · Paper 4
Why organisations budget
A budget is a financial plan, in money and/or quantities, for a future period. Budgetary control is the system of making managers responsible for budgets, comparing actual results with budget regularly, and acting on significant differences.
| Advantages of budgetary control | Disadvantages of budgetary control |
|---|
| Planning: forces managers to think ahead and spot problems (a cash shortage) early | Time-consuming and costly to prepare and monitor |
| Co-ordination: departments work to the same plan | Based on estimates; becomes out of date if conditions change |
| Control: actual results are compared with budget and variances investigated | Managers may pad budgets (budget slack) to make targets easy |
| Responsibility: each manager knows what they are accountable for | Can be rigid: managers spend to the budget (“use it or lose it”) |
| Motivation: realistic targets give staff something to aim for | Imposed or unrealistic targets demotivate |
| Budgets on spreadsheets: advantages | Disadvantages |
|---|
| Linked cells update every budget when one figure changes | One wrong formula spreads errors through every budget |
| “What if?” analysis (price rise, lower sales) is quick | Needs staff with spreadsheet skills; training costs |
| Fewer arithmetic errors; neat, shareable output | Risk of data loss or unauthorised changes without backups and passwords |
| Easy to roll forward to the next period | Results can look more precise than the estimates behind them |
The master budget is the summary of all the functional budgets: the budgeted statement of profit or loss, the budgeted statement of financial position and the cash budget.
Practice Question 1
State two advantages and two disadvantages of preparing budgets on a spreadsheet.
2. Sales, Production, Purchases and Labour Budgets
Syllabus 4.3.1 · A Level · Paper 4
Units first, then money
3. Trade Receivables, Trade Payables and Cash Budgets
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