2.2.4- Budgets

Question 1

Purpose of a budget

Answer 1

-financial plan and an agreed spending limit within a business
-usually based on objectives within the business
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Question 2

Reasons for budgeting

Answer 2

planning- anticipating problems before they arise and being proactive
motivation- allows managers to feel responsible for the money they are in control of
decisions- gives power to those to make financial decisions, best in place to make them

Question 3

Zero based budgeting

Answer 3

• budget set by a business using figures based on potential performance
• takes away all historical data and starts on a clean slate
• good for start up businesses as they will have no historical data
• levels of expenditure justified based on the number of customers they’re likely to serve in the upcoming year

Question 4

Variance analysis

Answer 4

• analysing the budget figures against what actually happens (the variance between the two)
• favourable variance- manager has spent less then what they budgeted for
• adverse variance- manager has overspent

Question 5

Difficulties of budgeting

Answer 5

• tendency for managers to spend up to the limit
• may cause interdepartmental rivalries if one gets more money than the other
• difficult to plan (unforeseeable circumstances)