2.2.4. Budgets

Question 1

define budget

Answer 1

a quantitative economic plan prepared and agreed in advance, for a set period of time

Question 2

define budgetary control

Answer 2

a business system that involves making future plans, comparing the actual results with the planned results and then investigating the causes of any differences

Question 3

define historical figures

Answer 3

quantitative information based on past trading records

Question 4

define production cost budget

Answer 4

a firms planned production costs for a future period of time

Question 5

Define sales budget

Answer 5

a firms planned sales for a future period of time - can be measured in terms of volume or revenue

Question 6

define variance

Answer 6

the difference between actual financial outcomes and those budgeted

Question 7

define variance analysis

Answer 7

the process of calculating variances and attempting to identify their causes

Question 8

define zero based budgeting

Answer 8

a system of budgeting where no money is allocated for costs or spending unless they can be justified by the fund holder (zero value)

Question 9

what the purpose of budgets?

Answer 9

control and monitoring
planning
co-ordination
communication
efficiency
motivation

Question 10

what are the two key types of budgets?

Answer 10

sales budget
production cost budget

Question 11

how are budgets made?

Answer 11

often using historical data
adjustments will be made to account for changes in production or costs.

Question 12

explain what is a zero based budget?

Answer 12

a budget set for a business using figures based on potential performance
-takes away historical assumptions -> a clean slate
-used by a start up
managers justify levels of expenditure based on number of customers they are likely to serve in the next year

Question 13

what does zero based budgeting allow for?

Answer 13

the regular evaluation of costs and helps to minimise the opportunity cost

Question 14

what do businesses try to minimise when making decisions?

Answer 14

the oppurtunity cost

Question 15

give 3 advantages of 0 based budgets

Answer 15

the allocation of resources should be improved
encourages managers to look for alternatives
staff motivation may improve as evaluation skills are used

Question 16

give 3 disadvantages of 0 based budgets

Answer 16

time consuming process
skilful decision making is required
managers may not be prepared to justify spending on certain costs

Question 17

what is an historical budget?

Answer 17

budget set for a business using current financial figures and based on historical performance of the business
-based on previous years income and expenditure

Question 18

give an advantage of historical budgets

Answer 18

realistic due to the use of historical data
-good baseline

Question 19

give a disadvantages of historical budgets

Answer 19

doesn’t account shocks, uncertainty or dynamic markets
doesn’t account for impact of competitors actions

Question 20

what does budgetary control consist of?

Answer 20

1. preperations of plans e.g. objectives
2. comparisons of plans with actual results
3. Analysis of variance - finding reasons for the differences between actual and expected financial outcomes

Question 21

define favourable variance

Answer 21

when the actual budget is better than the budgeted
for example if only budgeted 4,000 for sales revenue and actual was 6,000, thats a favourable variance of 2,000

Question 22

define adverse variance

Answer 22

where the actual figures are worse than the budgeted ones
for example, budgeted sales revenue of 4,000 and actual was 3,500, there would be an adversr variance of 500

Question 23

how do we work out the variance between the budgeted and actual budget?

Answer 23

V = (Actual - Budgeted /Budgeted data ) x 100

Question 24

what can variances be used to make decisions about?

Answer 24

marketing spend
promotion
pricing strategy
cost of sales - suppliers, distributors

Question 25

what are some difficulties about budgets?

Answer 25

fixed for a year and are inflexible
difficult to use when business is dynamic
time consuming
can make managers short sighted -> become budget driven over customer driven

Question 26

why is using a budget good?

Answer 26

can improve allocation of resources for the business
allows to see where the business is overspending and control it
increase motivation levels as they can use the budget to set aims