2.2.4 Budgets

Question 1

Define budgets

Answer 1

A budget is an estimate of income or expenditure for a set period of time.

Question 2

What are the 4 reasons businesses create budgets?

Answer 2

1. ) Planning
2. ) Forecasting
3. ) Communication
4. ) Motivation

Question 3

Why are budgets used for planning?

Answer 3

A business budget is vital for the small business to help them indetify where and when they might run into problems with finances.

Question 4

Why are budgets used for forecasting?

Answer 4

Using the business’s sales and expenditure forecasts, they can prepare projected profits for the next 12 months.

Question 5

Why are budgets used for communication?

Answer 5

Setting a budget in a small or large business is an ideal opportunity for the owners to communicate their objective of the business in a financial plan.

Question 6

Why are budgets used for motivation?

Answer 6

Budgets can be used to motivate staff to be more careful with the finances.

Question 7

What are the two types of budgets?

Answer 7

• Historical budget

- Zero based budget

Question 8

What is a historical budget?

Answer 8

This is a budget set for the business using current financial figures and based on historical performance of the business.

Question 9

What is a zero based budget?

Answer 9

This is a budget set for a business by using figures based on potential performance.

Question 10

What is an example of a favourable variance?

Answer 10

The manager has underspent in his depratment, this would be regarded as a success as any costs sut will have an impact on profit.

Question 11

What is an example of an adverse variance?

Answer 11

The manager has overspent and it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year

Question 12

What are the difficulties of budgeting?

Answer 12

• Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic.
• Tendency for managers to spend up to the limit.
• Time consuming to prepare, monitor and control.
• Unrealistic budgets may be demotivating.

Question 13

What are the problems with budgeting?

Answer 13

• Budgets can cause inter- department rivalry as some departments get more money than others.
• Can make managers short-term and short-sighted, they become budget driven rather than customer driven.
• Some industries its difficult to plan ahead because of large unplanned changes.