9706 · 4.3.1
Budgeting and Budgetary Control — FAQ
Frequently asked questions for 9706 Budgeting and Budgetary Control. Direct answers first, then deeper explanation — then practise with marking.
What is the main difference between a fixed budget and a flexible budget?
A fixed budget is prepared for only one level of activity and does not change, regardless of the actual output. A flexible budget is designed to be adjusted for the actual level of activity, providing a more meaningful 'like-for-like' comparison for performance evaluation and control.
Why is the sales budget usually the first functional budget to be prepared?
The sales budget is typically prepared first because sales demand is the most common limiting factor for a business. The level of sales dictates the level of production, which in turn drives the material, labour, and other operational budgets. If another factor, like production capacity, is the constraint, then the production budget would be prepared first.
How can a budget, which is meant to be a positive tool, end up demotivating employees?
A budget can be demotivating if it is imposed from the top-down without consultation and sets targets that employees perceive as unrealistic or unachievable. If performance against the budget is used to punish rather than to provide constructive feedback, it can also create a culture of fear and resentment, leading to reduced morale and productivity.
What is the purpose of a profit reconciliation statement?
Its purpose is to provide a detailed explanation for why the actual profit differs from the originally budgeted profit. It breaks down the total difference into specific variances (e.g., sales volume, sales price, material cost, labour efficiency), allowing management to understand the key drivers of performance and take targeted corrective action.