2.2.4 Budgets

Question 1

Definition of budget

Answer 1

A quantitive economic plan prepared and agreed in advance

Question 2

What are the 4 purposes of budgets?

Answer 2

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

Question 3

What are the 2 types of budgets?

Answer 3

1. Sales budget

2. Production cost budget

Question 4

Definition of zero based budget

Answer 4

When no money is allocated for costs or spending unless they can be justified by the fund holder (they’re given a zero value)

Question 5

What is the difference between favourable and adverse variance?

Answer 5

Favourable variance is when the manager has underspent and adverse variance is when the manager has overspent

Question 6

What are the difficulties of budgeting?

Answer 6

• inflexible
• gives a tendency to spend up to the limit
• time consuming
• unrealistic budgets can demotivate
• can make managers become budget driven rather than customer driven