2.2 - Budgets (Baseline revision)

Question 1

What is a budget?

Answer 1

A financial plan for the future (forecast/prediction)

Question 2

Types of budgets

Answer 2

zero based
historical figures

Question 3

What is a zero based budget?

Answer 3

setting all future budgets at £0, to force
managers to justify the spending levels they say they need in future

Question 4

What is a historical budget?

Answer 4

When a firm treats last year’s budget figures as
the main determinant of this years budget

Question 5

What is a variance?

Answer 5

The budget can be compared to actual figures and any difference =
variance

Variance is the difference between the budgeted figure and the
actual figure

Question 6

Types of variance

Answer 6

Favourable
Adverse

Question 7

Favourable variance

Answer 7

increases profit

Question 8

Adverse variance

Answer 8

decreases profit

Question 9

purpose of budget 1

Answer 9

control and monitoring - managers can set objectives and targets
that give the business a sense of direction. Budgets can be monitored
and intervention or corrective actions can be taken

Question 10

purpose of budget 2

Answer 10

Planning – managers are forced to think ahead and could anticipate
problems and find solutions

Question 11

purpose of budget 3

Answer 11

Co-ordination- different departments can work together e.g
Marketing and Finance can decide which costs they have in common
and activities can be co-ordinated for more efficient running of the
business

Question 12

purpose of budget 4

Answer 12

Motivation – budgets that are clearly communicated can be used as
a motivator to employees who control the budgets as an indication
of their success

Question 13

difficulty of budget 1

Answer 13

If budgets are unrealistic, employees may be demotivated

Question 14

difficulty of budget 2

Answer 14

Managers can be budget driven and not profit driven

Question 15

difficulty of budget 3

Answer 15

Inflexible budgets could cause business to suffer

Question 16

difficulty of budget 4

Answer 16

Setting budgets can be costly and time-consuming (specifically for new
businesses without any previous data)

Question 17

difficulty of budget 5

Answer 17

Budgets can cause inter-department rivalry as some departments get
more money than others

Question 18

difficulty of budget 6

Answer 18

Some industries may find it difficult to plan ahead because of large
unplanned changes e.g. in farming the weather can have a huge
impact on crops

Question 19

types of liability

Answer 19

limited
unlimited

Question 20

Unlimited liability

Answer 20

Some businesses do not have a separate legal identity and in the
eyes of the law the business and the owner are considered the same
person

As a result, the owner is personally liable for the firm’s debts and
may have to pay for losses made by the business out of their own
pocket. This is called unlimited liability

Question 21

Limited liability

Answer 21

The owner is only responsible for the debt of the firm up to the
investment that has been made to the business. Private/personal
assets are protected

Question 22

sources of finance

Answer 22

selling assets
retained profit
venture capital