2.2.4 Budgets Flashcards
What are the purposes of budgets
-to get managers to spend wisely
-it gives motivation to workers if they have responsibility of money
-ensures no department spends more than a company expects
-helps to anticipate problems and develop solutions
-can be set against objectives to measure success
What are the problems of budgeting
-time consuming
-can cause inter department rivalry if one department receives more money than another
-can make managers budget driven rather than customer driven
-difficult for dynamic businesses
What is a historical figure budget
It’s a budget set for a business based on last years sales
What is a problem with using historical finance budgets
Past performance of a business isn’t always accurate and may differ year to year
What is zero based budgeting
A budget set to zero each year and justified budget is set based on potential performance
What is good about zero based budgeting
-It reduces wastage that occurs if all budgets simply creep upwards year after year
-can be used when starting up a business
What is bad about zero based budgeting
It’s very time consuming
What are the two types of budget variances
Favourable
Adverse
What is variance analysis
It’s where a business can see the difference between the budget and reality of how much has been spent, usually found using Microsoft excel
What is favourable variance
The manager has underspent, the budget is higher than reality.
It can be a success as and cost cuts will increase profit
What is adverse variance
The manager has overspent, the actual figure was worse than the budget figure
why do budget variances occur
-the budget was unrealistic
-the target was not bet due to factors beyond the budget holders control
-the target was not be due to factors within the budget holders control
what can happen if a budget is adverse
the person in charge of the budget may be held accountable and may become demotivated.
