2.2.4. Budgets

Question 1

Purpose of a budget

Answer 1

Budget is a financial plan that business sets for costs and revenues.
-Income budget: sets targets for value of sales to be achieved
-Expenditure budget: gives budget holder limit which they must keep departments costs

Purpose if to focus expenditure on company’s main objectives for time period

Question 2

Types of budgets

Answer 2

1.Historical figure budget-Budget based on past data of sales and costs from previous years

2.Zero based budget-approach where budgets aren’t allocated, requiring all spending to be justified

Budgeted variance= difference between budgeted figure and actual figure achieved by end of budgetary period

Question 3

Purpose of variance analysis

Answer 3

Identify reasons for difference between actual and budgeted figures, aiding decision making and performance evaluation.

Profit variance= Actual profit- Budgeted profit

Question 4

Adverse variance vs Favourable variance

Answer 4

-Favourable variance means actual figures are better than budgeted figures

-Adverse variance is when actual profit figures achieved are worse than budgeted profit figures.