Accounting Practice exam Question Help

[harshilgupta]

Can somebody tell me the answer to this theory question from a  Practice exam. The Neville Box textbook does not explain this well.


Question: Mark runs a store that sells a range of sporting equipment, called sports satisfaction. Currently Mark prepares a yearly budget on the 31 of December, but his accountant has suggested that due to the type of products he sells, he should be making budgets monthly.

Explain three reasons in detail why Mark should consider preparing budgets monthly instead of continuing to prepare them yearly.

(6 Marks - 1 Page of given lines in the Answer book)

[Damoz.G]

I'm on my phone so this will be brief.

Helps to improve decision making, thus supporting Relevance because the Budgeted figures will be more accurate when prepared frequently. It ensures that when Variance reports are prepared, the difference in actual versus budgeted figures will be more accurate.

Frequent budgeting also allows the owner to become aware of possible events that can occur, such as a budgeted net increase in cash position, and can therefore take steps to improve it immediately. Could also explain how all transactions can't be predicted for a whole year.

Then you could add in Reporting Period as well if you wanted to.

Hope this helps to get started.

[massachusetts8]

Similar to what Damoz said, the two main reasons for budgeting are planning and control.
Consecutive monthly budgets allow owner to make decisions as to when particular cash activities such as a loan repayment should occur. The owner may decide to defer the payment or bring it forward. So bottomline, poor areas of performance are highlighted so that corrective action can be taken. QC: Relevance
Moreover, as Damoz said, actual performance of the business can be compared with budgeted performance. Significant variances are higlighted and corrective action taken. Also, once the variance reports are complete, they can provide a foundation/base for future budgets to be prepared. QC: Reliability ( information in next budgets are slightly more accurate, but given that, economic fluctuations can affect actual results)
Consecutive monthly budgets are usually better than yearly budgets as the owner can have more 'updated' information in a way... Also, as a small note, monthly budgets may act as motivation for employees to reach their targets and therefore better enhance business performance.
I probably just repeated what Damoz said but yeah