2.2.4 Budgets

Question 1

Budgets

Answer 1

Forecasts or plans for the future finances of a business. Sets out targets to be met, costs of achieving them and how that spending might be financed

Question 2

Income budget

Answer 2

A target set for the amount of revenue to be achieved in a set period of time

Question 3

Expenditure budget

Answer 3

A limit placed on the amount to be spent in a given period of time

Question 4

Profit budget a

Answer 4

A target set for the surplus between income and expenditure in a given period of time

Question 5

Purpose of setting budgets

Answer 5

Provides a quantifiable targets that outcomes can be compared to, helps planning and forecasting to inform decision making, motivated budget holders due to increased responsibility

Question 6

Description of income budget

Answer 6

Can be split by products, services or departments, may be translated into individual sales targets for staff - motivating, informed by market research, informs predicted cash inflows and in the cash flow forecasts

Question 7

Description of expenditure budget

Answer 7

Can be split by department, function or product, responsibly can be passed to individual managers, informs predicted cash outflows and cash flow forecasts, allows for monitoringninder spending and over spending

Question 8

Description of profit budgets

Answer 8

Calculated based on income and expenditure budgets, may be set for the business and a whole or for individual department, products of branches, will be used to inform decision making

Question 9

Advantages of budgets

Answer 9

Help to control income and expenditure, provide clear tragedy’s for managers, authors delegates to manangers - motivating, help to focus on costs, helps coordinate departments

Question 10

Disadvantages of budgets

Answer 10

Can cause rivalry between different departments to compete for funding, if budget is too inflexible it might miss out on opportunities, restricted budgets may be demotivating, setting budgets can be time consuming and expensive, actual results can be very different to the value of original budget

Question 11

Historical figures

Answer 11

Budget initially based on the figures from the previous year

Question 12

Extrapolation

Answer 12

Means assuring that past trends will continue in the future. It must be used with care because changes in business conditions may require adjustments to be made

Question 13

Advantages of historical budgeting

Answer 13

The budget is table and change is gradual, realistic as based on actual results, managers can operate their departments on a consistent basis, system relatively simple to operate and easy to understand, conflicts should be avoided if departments are treated similarly

Question 14

Disadvantages of historical budgeting

Answer 14

Assumes activities and methods of working will continue in the same way, no incentive for developing new ideas, encourages spending of the budget so it can be maintained for the next year, budget may become outdated and not relevant to the the level of activity.

Question 15

Zero based budgeting

Answer 15

Means no budget is set and no money is allocated to cover costs. Managers must be prepared to bid for and justify spending on their departments

Question 16

Advantages of zero based budgets

Answer 16

Resources should be allocated more efficiently, easier to adapt as circumstances change, gives more flexibility in response to changes in the market or economy, forces managers to think and plan more careful,t

Question 17

Disadvantages of zero based budgeting

Answer 17

Can be more expensive, can be more time consuming, forceful managers may be more successful in attracting funds than those who may have more worthwhile projects

Question 18

Variance analysis

Answer 18

Calculation and investing the difference between and results and the budget

Question 19

Variance

Answer 19

Arises when there is a difference between actual and budget figures

Question 20

Management by exception

Answer 20

The process of focusing on activities that require attention and ignoring those that appear to be running smoothly

Question 21

A favourable variance means

Answer 21

Expenditure was lower than expected in the budget, profits were higher than expected, income was higher than expected

Question 22

Adverse variance might arise because

Answer 22

Expenditure was higher than expected in the budget, profits were lower than expected, income was lower than expected

Question 23

Significance of variance depends on

Answer 23

Whether it was positive or negative, was it foreseen, how big was the variance, the cause

Question 24

Why aren’t all adverse variances bad news

Answer 24

It might result from something good eg higher production costs that might have occurred because sales are significantly higher

Question 25

Causes of variances

Answer 25

Competitors eg new product, suppliers eg changes prices, changes in the economy eg minimum wage, internal inefficiency, internal decision making

Question 26

Difficulties of budgeting

Answer 26

Innacurate assumptions can make a budget unrealistic, lead to inflexibility in decision making, budgets need to be changed when circumstances chnsge, time consuming, demotivating for employees, departmental rivalry