2.2.4 Budgeting

Question 1

What is a budget

Answer 1

A forward looking financial plan

Question 2

What is the purpose of budgets

Answer 2

1. Monitor business performance
2. Motivate staff
3. Improve efficiency

Question 3

How do budgets help monitor business performance

Answer 3

By comparing budgeted with actual figures

Question 4

How do budgets help motivate staff

Answer 4

When a budget is achieved
The responsibility for managing a budget
Have an idea of what is happening in the business
Rewards may be linked to budget targets

Question 5

How do budgets help improve efficiency

Answer 5

Working to a set budget will encourage managers to find more efficient methods

Question 6

What is the process of preparing a budget

Answer 6

1. Determine the budget period and set targets/objectives to e achieved
2. Obtain information through market research or historical data
3. Prepare budget
4. Produce smaller subsidaiary budgets

Question 7

What is a historical budget

Answer 7

The main focus is last years budget with adjustments made for inflation and other foreseeable changes

Question 8

What is a zero-based budget

Answer 8

A budgeting system where no money is allocated until m it can be justified by the fund holder

Question 9

What is the advantage of zero based budget

Answer 9

Avoids budgets creeping up every year

Question 10

What is the disadvantage of zero based budget

Answer 10

Time consuming to constantly gather detailed information for making spending decisions

Question 11

How do you set budgets

Answer 11

1. Income or sales revenue budget
2. Production budget
3. Profit budget

Question 12

What is an income or sales revenue budget

Answer 12

Planned income or sales revenue for a time period
This is achieved by multiplying price by sales, usually for each month

Question 13

What is a production budget

Answer 13

Once a sales budget has been produces, a production budget can be calculated
This will be based on the expected sales

Question 14

What is a profit budget

Answer 14

This will show the expected profit over a time period taking into account all of the income and expenditure of the firm

Question 15

What are 2 pieces of information that companies use to set next years budget

Answer 15

Last years budget, inflation rates

Question 16

What is a budgeting variances

Answer 16

The amount by which the actual results differs from the budgeted figure.
It it usually measured on either a monthly or yearly basis

Question 17

What are the 2 types of variance

Answer 17

1. Favourable variance
2. Adverse variance

Question 18

What is favourable variance

Answer 18

One which leads to higher than expected profit, caused by wither revenue going up or costs going down

Question 19

What is adverse variance

Answer 19

One which leads to lower than expected profit due to wither revenue going down or costs rising

Question 20

What are the difficulties of budgeting

Answer 20

1. Setting budgets
2. Rigidity
3. Short term decisions

Question 21

How is setting budgets a difficultie of budgeting

Answer 21

Inaccurate sales data, conflict, costs, overambitious objectives

Question 22

How is rigidity a difficultie of budgeting

Answer 22

Opportunities may be missed if the budget finance is not avaliable

Question 23

How is short term decisions a difficulty of budgeting

Answer 23

May be taken to stay within the current budget that will harm the firm in the long term
E.g. cheaper raw materials