2.2.4 Budgets

Question 1

What is a Budget?

Answer 1

A budget is a financial plan for the future considering the revenues and costs of the business

Question 2

What is zero based budgeting?

Answer 2

• Where no budget is set as one cannot be justified

- Managers must be able to show that spending this money will benefit the company

Question 3

Advantages of zero based budgeting

Answer 3

• Allocation of resources could be improved

- A questioning attitude may be developed which will encourage efficiency

Question 4

Disadvantages of Zero Based Budgeting

Answer 4

• Very time consuming as research is to be thorough looking at different costs
• May adversity affect motivation

Question 5

What is Variance Analysis?

Answer 5

Budget figure - Actual figure

Shows how much they spend in comparison to the predicted amount to be spent

Question 6

Why is Variance analysis useful?

Answer 6

Helps managers identify problems which can then be resolved

Question 7

What are the two different variances?

Answer 7

Favourable variance - Actual figures are less than planned or better than planned EG: Actual wages less than predicted

Adverse Variance - Actual figures above planned or received less revenue than expected
EG:Sales revenue below actual figure

Question 8

How are variances caused?

Answer 8

• Competitors behaviour affects demand
• Change in economy i.e. Minimum wage increase
• The cost of raw materials increase

Question 9

Internal factors causing a variance?

Answer 9

• Improving efficiency causes favourable variance
• Overestimating how much money can be saved
• Change in price

Question 10

How is Variance Analysis used?

Answer 10

1. To plan ahead
2. Re-motivate staff
3. Change marketing mix
4. Lower sales price
5. Find cheaper suppliers
6. Informs the business of how efficient the budget is

Question 11

Difficulties of budgeting

Answer 11

• Based on historical data
• Based on human estimates and assumptions
• Bias/ motives

Question 12

Benefits of budgeting

Answer 12

1. Can be used for target setting/ measuring performance
2. Can be motivational if realistic and achievable
3. Can help identify inefficiencies

Question 13

Drawbacks of budgeting

Answer 13

1. Can be demotivating if the budget is unrealistic
2. Vulnerable to external shocks
3. Can cause division within company if departments end up competing for sales or a budget

Question 14

What variance is good for an income budget?

Answer 14

Favourable

Gaining more than predicted

Question 15

What variance is good for a cost budget?

Answer 15

Favourable

If below the initial cost set for the year

Question 16

What variance is good for a profit budget?

Answer 16

Favourable

If above what was budgeted