2.2.4 budget Flashcards
what is a budget
a financial plan for the future concerning the revenues and costs of a business
what are the two main approaches to budgets
- historical budgets
- zero based bbudgets
what is historical budgets
use last years figures as the bais for the budget
what is zero based budgets
budgeted costs and revenue that are set to zero
how is budgeting a process
the process by which financial control is exercised in the business
what are the difficulties in budgeting accurately
-sales forecasting (harder when market experiences rapid change (e.g new technology) -costs (always likely to be unexpected costs)
what is the definition of budget varience
calculating and investigating the difference between actual results and budget
what are the two types of varience
- adverse varience
- favourable variance
what does adverse variance mean
an adverse variance is one that is bad for the business
- For example costs higher than expected
- for example revenue/profits lower than expected
what does favourable variance mean
a favourable variance is one that is good for the business
- e.g costs lower than expected
- e.g revenue/profits higher than expected
what are the possible cause of favourable variences
- stronger market demand than expected =higher revenue
- selling price peice increased higher than budget
- competitor weakness leading to higher sales
what are the possible causes of adverse variance
- unexpected events lead to unbudgeted costs
- over spend by budget holders
- sales forecasts prove over-optimistic
what do variences show
- size (sizs in money and percentage terms)
- cause
- whetherit is temorary problem or the result of a long term trend
what are theproblems and limitations of budgets
- can lead to inflexibility in decision making
- are only as goodas the data being used
- take time to complete and manage
