2.2 Budgets- move to 2.2 Flashcards
What is the purpose of budgeting?
- Ensure no one is spending more than expected
- Managers success/ failure managed
- Spending power delegated to local managers (motivate share holders)
- Help motivate staff
What is an income budget?
Target for value of sales
What is an expenditure budget?
Limit where budget holders must keep their departments cost under
What is the calculation for profit?
Revenue - total costs
What is a historical budget?
Firms treat this years budget as main determinant for next years budget
- Minor adjustments made
What is a zero-based budget?
Each departments budget is zero and budget holders have to ask and justify why they need money
Drawbacks of a zero-based budget
- Pain to keep ask
- May feel disempowered/ restricted
Benefits of a zero-based budget
+ Reduce the amount spent
+ Avoid budgets creeping up
What is a favourable variance?
Higher profit than expected
- Revenue up
- Costs down
What is an adverse variance?
Reduced profit
- Revenue down
- Costs up
What are the solutions to budget variances?
- Budget change
- Staff training
- Reward staff
- Change supplier
- Reallocate budget
- New marketing tactics
- Review product portfolio
What are the difficulties of budgeting?
- Hard to ensure targets are set realistically
- Costs subject to change
- Competitor actions may impact
- Bias
- Imposing budgets (less motivating)
- Not understanding cause of variance (blaming for not making budget)
Advantages of budgeting
- Provide quantifiable target (sale targets, expenditures in control, efficient)
- Decision making (priorities, budgets from previous years, cuts to be made)
- Motivate budget holders (increased responsibility)
Disadvantages of budgeting
- Conflict potential
- Restrictive (opportunities missed, inappropriate to cut costs)
- Time consuming
What is effecting budgeting?
- Firm with objective of growth (require more funds)
- Setting targets (increase efficiency)
- Hat budgets reviewed frequently (assess effectiveness)
