Topic 6 of 6 · Form 6
Budgeting, standard costing and investment appraisal
Functional budgets (sales, production, purchases, labour), cash budgets, master budgets; flexible budgets; budgetary control and behavioural aspects.
Notes for this topic 1 file, in order
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Budgeting
Functional budgets (sales, production, purchases, labour), cash budgets, master budgets; flexible budgets; budgetary control and behavioural aspects.
Worked example: Planned sales 5 000 units; opening inventory 800; closing inventory 600. Find the production budget.
5 000 + 600 − 800 = 4 800 units
Standard costing
Material price and usage, labour rate and efficiency, variable overhead, fixed overhead expenditure and sales price and volume variances; reconciliation of budgeted and actual profit; interpreting variances.
Investment appraisal
Payback, accounting rate of return, net present value and internal rate of return; sensitivity analysis; non-financial factors.
Worked example: A project costs US$50 000 and gives cash inflows of US$20 000 a year for 3 years. Using a 10% discount rate (factors 0.909, 0.826, 0.751), find the NPV.
20 000 × 2.486 = 49 720 → NPV = −US$280 → reject on financial grounds
Check yourself
- Standard 2 kg at US$4 per unit; actual output 1 000 units used 2 100 kg costing US$8 190. Find the material price and usage variances.
- What is the IRR?
- Give one behavioural problem of budgeting.
Show answers
- Price: (4 − 3.90) × 2 100 = 210 F; usage: (2 000 − 2 100) × 4 = 400 A
- The discount rate that gives an NPV of zero.
- Any one: budget slack, demotivation if imposed, short-termism, conflict between departments.
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