2.2.4 Budgets

Question 1

Budgets

Answer 1

Financial plan for future concerning revenues and costs

Question 2

importance of budgets

Answer 2

process In which financial control is exceriszed
budgets prepared can be compared with actual performance to establish any variances
managers responsible for costs within budgets
can take remedial action if adverse variances are excessive

Question 3

uses of budgets

Answer 3

• sets targets
• allocates resources
• communicate targets
• monitor performance
• provides direction
• control income and expenditure

Question 4

Budgets purpose

Answer 4

provides quantifiable target - can be communicated to budget holders and measures against actual outcome
Helps with planning and forecasting to inform decision making
Motivate budget holders due to increased priority

Question 5

Types of budget

Answer 5

INCOME

• target set for amount of revenue to be achieved in set period of time
• can be split by departments, products or services

EXPENDITURE

• limit placed on amount to be spent in a given period of time
• allows monitoring of underspending Aswell as overspending
• can be split by department function or product

PROFIT

• target set for surplus in given period of time
• calculated based on income and expenditure budget

Question 6

Ways to set budgets

Answer 6

historical figure budgetting

• setting budget based on previous years
• can be adjusted in line with actual outcomes
• can be linked with ability to meet objectives
• doesn’t encourage efficiency

zero budgetting

• setting budget of 0
• all departments have to justify expenditure
• time consuming
• can reduce waste

Question 7

difficulties of budgeting

Answer 7

• dependent upon predictions and forecasts
• costs are subject to change
• competitor actions are unknown
• may be subject to bias
• take time and effort = opportunity cost

Question 8

challenges of sales forecasting

Answer 8

• harder when market experiences rapid change

- competitor actions difficult to predict

Question 9

challenges of costs

Answer 9

• always likely to be unexpected costs
• will vary depending on sales budget
• changes in external environment will impact costs

Question 10

Variance analysis

Answer 10

Calculating and investigating differences between actual results and the budgets
can be adverse or favourable

Question 11

interpreting variances

Answer 11

1- identify the cause of a variance
2- consider the effect
3- if appropriate look for a solution

once variance has been identified managers need to decide how to respond:

• change budgets
• training
• reward staff
• change supplier
• relocate budgets

Question 12

possible causes of variances

Answer 12

• actions of competitors
• actions of suppliers
• changes in economy
• internal inefficiency
• internal decision making