12. Budgeting Flashcards
What is a budget ?
A financial plan that is agreed in advance
A plan NOT a forecast. A Forecast is a prediction, a budget is a planned outcome that a business hopes to achieve.
It shows money needed for spending and how that might be financed -> based on the objectives of the business
What are the benefits/purposes of budgeting?
- Control monitoring
- Planning
- Communication
- Coordination
How is control monitoring a benefit of budgeting?
Setting objective/target that is translated to the budget
Managers can compare the actual results to the budget
How is planning a benefit of budgeting?
Without budget managers may work on a day-to-day basis
Plans for the future will help anticipate problems and the solution for them
How is communication a benefit of budgeting?
Large businesses have many departments and diffwrent operating sights eg. Multinational
Budgets are a way for managers to control/coordinate activities in different areas
How is coordination a benefit of budgeting?
Gives workers/ managers a clear framework
Removes the element of uncertainty/highlights tasks that need to be under control
Allows business activities to be communicated with workforce
What are the two types of budgets?
Sale budgets
Production cost budgets
How are budgets prepared?
Using historical data—> data the business has gathered in the past
What are budgets that make use of historical data
Master
Profit budget
Sales volume
Sales revenue
Production costs
Overheads
Marketing
How does master budgeting make use of historical data?
Summary of all budgets
How does profit budgeting make use of historical data?
shows planned revenue,costs profits
How does sales volume make use if historical data?
key budget that shows planned sales level
How does sales revenue make use of historical data?
Uses sales volume and prices to show planned revenue
How do production costs make use of historical data?
based on sales volumes and all planned production costs
How do overheads make use of historical data?
Shows all planned indirect costs eg rent, insurance
How does marketing make use of historical data?
Shows all planned spending on research, promotion and advertising
What is zero-based budgeting?
Budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your own spending
This is new data not historical
Production and manufacturing costs eg. Raw materials are easy to value
However it is not easy to measure costs, as they can’t be justified. Therefore no money is allocated into the budget for them
Encourages regular evaluation of costs, helps minimize unnecessary purchases
How do you use budgets?
- Preparation of plans
- Comparisons of plans with actual results
- Analysis of variances
What are the advantages of zero-based budgeting?
- Allocation of resources should improve
- Improved staff motivation
- Encourages managers to took for alternatives
What are the disadvantages of zero-based budgeting?
- Time consuming
- Managers may not be prepared to justify spending on certain costs
- Careful decision-making required —> subjective opinion may influence it
What are variances?
Difference between the figure the business has budgeted for and the actual figures
Usually calculated at the beginning of the budgeting period
Can be favourable (more) or adverse (less)
What are the types of variances
Adverse: necessary to take action to ensure they’re avoided in future
Favorable: businesses can learn from understanding why it occurred and introduce strategies and systems to continue improvements
IMPORTANT: might them decide to look for new suppliers
Variance analysis may help business decision makers because of information it provides about financial incomes and their causes
What are the difficulties of budgeting?
- Setting a budget
- Effect on motivation
- Budgets can be manipulated by managers
- Rigidity
- Short termism
