2.2.4. Budgets Flashcards
define budget
a quantitative economic plan prepared and agreed in advance, for a set period of time
define budgetary control
a business system that involves making future plans, comparing the actual results with the planned results and then investigating the causes of any differences
define historical figures
quantitative information based on past trading records
define production cost budget
a firms planned production costs for a future period of time
Define sales budget
a firms planned sales for a future period of time - can be measured in terms of volume or revenue
define variance
the difference between actual financial outcomes and those budgeted
define variance analysis
the process of calculating variances and attempting to identify their causes
define zero based budgeting
a system of budgeting where no money is allocated for costs or spending unless they can be justified by the fund holder (zero value)
what the purpose of budgets?
control and monitoring
planning
co-ordination
communication
efficiency
motivation
what are the two key types of budgets?
sales budget
production cost budget
how are budgets made?
often using historical data
adjustments will be made to account for changes in production or costs.
explain what is a zero based budget?
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
what does zero based budgeting allow for?
the regular evaluation of costs and helps to minimise the opportunity cost
what do businesses try to minimise when making decisions?
the oppurtunity cost
give 3 advantages of 0 based budgets
the allocation of resources should be improved
encourages managers to look for alternatives
staff motivation may improve as evaluation skills are used
give 3 disadvantages of 0 based budgets
time consuming process
skilful decision making is required
managers may not be prepared to justify spending on certain costs
what is an historical budget?
budget set for a business using current financial figures and based on historical performance of the business
-based on previous years income and expenditure
give an advantage of historical budgets
realistic due to the use of historical data
-good baseline
give a disadvantages of historical budgets
doesn’t account shocks, uncertainty or dynamic markets
doesn’t account for impact of competitors actions
what does budgetary control consist of?
- preperations of plans e.g. objectives
- comparisons of plans with actual results
- Analysis of variance - finding reasons for the differences between actual and expected financial outcomes
define favourable variance
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
define adverse variance
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
how do we work out the variance between the budgeted and actual budget?
V = (Actual - Budgeted /Budgeted data ) x 100
what can variances be used to make decisions about?
marketing spend
promotion
pricing strategy
cost of sales - suppliers, distributors
what are some difficulties about budgets?
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
why is using a budget good?
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
