2.2.4 - Budgets

Question 1

Def budget

Answer 1

Is a financial plan for the future of costs and incomes for a particular aspect of a business that must be reached over a given period of time

Question 2

Def variance analysis

Answer 2

Involves looking back to calculate the difference between a budget figure and use figure that occurred

Question 3

Name 3 types of budget

Answer 3

Income budget
Expenditure budget
Profit budget

Question 4

Def income budget

Answer 4

Sets a target for the value of sales to be achieved

Question 5

Def expenditure budget

Answer 5

Gives budget holders a limit under which they must keep their department costs

Question 6

Def profit budget

Answer 6

Based on combined sales and cost budgets to form a basis for performance bonuses

Question 7

4 purpose of budgets

Answer 7

• focus on expenditure of companies main objectives for a time period
• ensures no department or individual spends more than company expects
• spending power delegated to local managers who know how to spend wisely
• can help motivate staff in departments to try and hit targets

Question 8

5 step process of budgeting

Answer 8

1 directors agree a master budget for whole firm
2 this is divided into regional managers
3 regional managers allocated a budget to branch managers
4 branch managers divide budget to section managers
5 section manager get all shop-floor workers to help meet budget targets

Question 9

3 reasons budget variances can occur

Answer 9

• original budget was unrealistic
• target wasn’t met due to factors beyond budget holders control
• the target wasn’t met due to factors within budget holders control

Question 10

3 difficulties of budgeting

Answer 10

• setting budgets can be hard and unrealistic
• agreeing or imposing budgets less motivating than giving budget holders genuine say in setting own targets
• failing to understand cause of budget variance: potentially blaming manager - demotivating

Question 11

2 different ways of budgeting

Answer 11

Historical budgets

Zero-based budgeting

Question 12

Historical budgeting description

Answer 12

• set using last years budget as a guide, adjustments made doe changes in circumstances in department

Question 13

Zero based budgeting description

Answer 13

Involves setting each budget to zero each year and then expecting budget holder to justify a budget they can work to in the oncoming year

Question 14

Con of zero based budgeting

Answer 14

Very time consuming

Question 15

Pro of zero based budgeting

Answer 15

Can prevent wastage that occurs if all budgets creep upwards year after year from historical budgeting

Question 16

What’s more important than the process of budgeting

Answer 16

Extent to which budgets are agreed or imposed. Imposing budgets reduces sense of responsibility for budget-holder

Question 17

Def actual budget

Answer 17

The amount of cost spent/ revenue that is accounted for during the time period

Question 18

Def variance

Answer 18

Difference between budgeted - actual figures

Question 19

3 things variances can be

Answer 19

Adverse, favourable and neutral

Question 20

Def adverse

Answer 20

The actual figure was worse than the budgeted figure

Question 21

Def favourable

Answer 21

The actual figure was better for the business that the budgeted figure

Question 22

What happens to the variance when actual income budget lower than budget

Answer 22

Lower than expected, adverse

Question 23

What happens to the variance when the actual income budget is higher than the budget

Answer 23

Higher than expected, favourable

Question 24

What happened when the actual expenditure budget is lower than the budget

Answer 24

Higher than expected, favourable

Question 25

What happens to the variance when the actual expenditure budget is higher than the budget

Answer 25

Lower than expected, adverse