2.2.4 Budgets

Question 1

define budget and what is the purpose of them

Answer 1

A financial plan for the future.

Purpose is to ensure efficient spending

Question 2

What are historical budgets?

Answer 2

When budgets are based on historical budgets and adjusted based on future estimations, events and professional judgement

Question 3

What are zero based budgets and what is a pro and a con?

Answer 3

When the budget is 0 and any spending has to be justifies by the budget holder to ensure spending is good value for money.
Can be time consuming but it can be efficient at minimising unnecessary costs.

Question 4

what are the benefits of budgets?

Answer 4

• can motivate employees
• helps managers review their decisions and activities
• budgets let departments coordinate spending
• can persuade investors that the business will be successful

Question 5

what are the problems with budgets?

Answer 5

• only as accurate as the data it was set on
• difficult to forecast sales as the past does not always reflect the future
• If unrealistic it loses its power as a motivational tool
• external shocks can occur

Question 6

How do you work out variance and what can it be used for?

Answer 6

actual figure / budgeted figure

can be used to analyse the accuracy of the budgeting process and help make decisions about budgeting adjustments.

Question 7

what does adverse and favourable mean?

Answer 7

Adverse means the business did worse than expected

Favourable means the business did better than expected