2.2.4 - BUDGETS Flashcards
What is a Budget?
an ESTIMATE of INCOME or EXPENDITURE for a set period of time
What are 4 Purpose of Budgets?
- PLANNING
- FORECASTING
- COMMUNICATION - objectives to be communicated with it
- MOTIVATION - should act as a motivation to the workforce, provides workers with targets and standards
What are 2 Types of Budgets?
Historical Budget
Zero Budget
What’s a Historical Budget?
BUDGET SET USING CURRENT FINANCIAL FIGURES and BASED on HISTORICAL PERFORMANCE of the BUSINESS
What is a Zero based budget?
BUDGET SET Using FIGURES BASED on POTENTIAL PERFORMANCE
this methods takes away all historical assumptions and STARTS with a CLEAN SLATE
What are ADVANTAGE of ZERO BASED BUDGETS
- the ALLOCATION of RESOURCES should BE IMPROVED
- a QUESTIONING ATTITUDE is DEVELOPED which WILL HELP to REDUCE UNNECESSARY COSTS and ELIMINATE INEFFICIENT
- STAFF MOTIVATION might IMPROVE because Evaluation Skills are practiced
What are DISADVANTAGE of ZERO BASED BUDGETS
- is TIME-CONSUMING because the BUDGETING PROCESS INVOLVES the COLLECTION and ANALYSIS of DETAILED INFO
- SKILLFUL DECISION MAKING REQUIRED
What are the 2 different types of Variance?
FAVOURBLE Variance
ADVERSE Variance
What is Favourable Variance?
the MANAGER has UNDERSPENT in his department, would be REGARDED as a SUCCESS as any costs cut will have an impact on profit
What is Adverse Variance?
the MANAGER has OVERSPENT
What are 3 Difficulties of Budgeting?
- often FIXED for a year , INFLEXIBLE when business is dynamic
- TIME CONSUMING to prepare, monitor and control
- UNREALSITIC budgets can be DEMOTIVATING
What are 3 Limitations of budgeting?
- can cause INTER-DEPARTMENT RIVARLY, some get more than others
- can MAKE MANAGER SHORT-TERM, and SHORT-SIGHTED
- SOME industries its DIFFICULT to PLAN AHEAD
