2.2.4 Budgets

Question 1

What is a budget

Answer 1

A budget is a target for
revenue or costs for a future
time period.

Question 2

Income budget:

Answer 2

This sets a target for the value of sales to be achieved.

Question 3

Expenditure budget:

Answer 3

This gives budget-holders a limit under which they must keep their department’s costs.

Question 4

Purpose of budgets

Answer 4

The focus expenditure on the company’s main objectives for a time
period.
• Expenditure budgets are set to ensure that no department or individual
spends more than the company expects.
• All budgets provide a yardstick against which performance can be
measured.
• Expenditure budgets allow spending power to be delegated to local
managers, who may understand local conditions better and be better
placed to decide how money should be spent at a local level.
• Both income and expenditure budgets can help to motivate staff in a
certain department to try to hit targets. Efficiency

Question 5

historical budget

Answer 5

set using last year’s budget as a guide and then making adjustments based on known changes in circumstances for the department,
so if 10% more staff have been employed at a branch, that branch’s income and expenditure budgets may be increased by 10%.

Question 6

Zero-based budgeting

Answer 6

setting each budget to zero each year
and then expects each budget-holder to justify a budget figure that
they can work to for the coming year. This is very time-consuming,
but can prevent the wastage that occurs if all budgets simply creep
upwards year after year under a system of historical budgeting. (Keeps cost down)

Question 7

Why variance analysis

Answer 7

allows managers to spot
areas where there is a significant difference between the budget and the reality. With an automated system it is possible to flag up variances of a
certain size only, so that managers can focus their attention on areas with
a significant variance. It is in the analysis of the causes of these variances that successful financial management tends to lie.

Question 8

Adverse variance

Answer 8

The actual figure was worse than the budgeted figure.

Question 9

Favourable

Answer 9

The actual figure was better for the business than the

budgeted figure.

Question 10

What does it mean if the income budget is lower than the budget

Answer 10

Adverse, low profit

Question 11

What does it mean if the income budget is higher than the actual budget

Answer 11

Favourable, high profit

Question 12

What does it mean if expenditure budget lower than actual budget

Answer 12

Favourable, high proft

Question 13

What does it mean if expenditure budget higher than actual budget

Answer 13

Adverse, lower profit

Question 14

Budget variances can occur for three underlying reasons.

Answer 14

The original budget was unrealistic,
The target was not met due to factors beyond the budget-holder’s control, The target was not met due to factors within the budget-holder’s control.

Question 15

Difficulties of budgeting- setting budgets

Answer 15

It can be hard to ensure targets are set realistically, but

also to avoid budgets creeping upwards over time.

Question 16

Difficulties of setting budgets: Agreeing or imposing budgets

Answer 16

Imposing budgets is far less motivating
and effective than giving budget-holders a genuine say in setting their
own targets, in agreement with senior managers.

Question 17

Difficulties of setting budgets: Failing to understand the causes of a budget variance

Answer 17

Blaming a
budget-holder for failing to meet a target that turned out to be
impossible is a sure-fire way of demotivating that manager.

Question 18

Difficulties of setting budgets: The costs of the system outweighing the benefits

Answer 18

In small businesses,
there is less need for financial control to be delegated as a single boss
may be able to keep an eye on all the finances without taking the time
to set up a system of budgets.