Basic Finance for Managers

Homework Assignment

1. The budget for the current year can be prepared by increasing or decreasing the expenses in the last year by the forecasting assumption of increase or decrease respectively. For example, for salaries, the budget for this year is equal to $60,000 * (1 + .02) = $ 61,200. Similarly, the budgeting is done for other expenses. This is shown in Table 1.

Table 1: Budget Calculations of Tom's Toyota Company

Last Year Forecasting Assumption Budget for this Year

Salaries $60,000 2% $61,200

Stationary $900 -1% $891

Telephone $2,500 3% $2,575

Electricity $1,200 2.50% $1,230

Office Rent $10,000 2% $10,200

Depreciation $4,000 0% $4,000

Total Budget $78,600 $80,096

2. A static budget for a period is a budget in which the values of inputs and output are anticipated before the period begins and the budget doesn't change with volume. Therefore, sales commissions in case of static budgets are also fixed. Static budget are used for comparing sales performance but are not advisable to be used for the performance of cost centers.

3. A flexible budget is a budget that has the room to adjust for changes in volumes and is prepared before the end of the given period. The purpose of a flexible budget is to compare the budget performance or perform a variance analysis assuming that volumes were known in the beginning. It is effectively used for performance of cost centers.

4. Zero based budgeting is the type of budgeting in which every item in the budget is evaluated from a zero base rather than on the basis of pre-approved baselines of previous years. Therefore, variances from previous years can't be used to define performance in case of zero based budgeting. This type of budgeting takes into account strategic needs and analyzes all costs and needs before budgeting whether they are more or less than previous years (CIPFA, 2007).

5. A period budget is the simplest form of budget in which revenue and expenses of a firm or an entity are estimated over a fixed period of time say an year generally based on past. The changes in revenue and expenses are estimated based on experience, market, their interrelationships and internal strategies of the firm.

6. A rolling budget is types of budget that is prepared for a fixed planning time horizon and is available for that time horizon by adding another period say a week or a month to the period just ended. Such a budget is very useful for companies that undergo changes quickly such as technology companies.

7. The cash collections in the month of June are simply given by the sum of 10% of sales in the month of April, 40% of sales in the month of May and 50% of sales in the month of June. That is,

Cash collections for June = 10% of $5,000 + 40% of $5,000