2.2.4 Budgets

Question 1

what is a budget?

Answer 1

a financial plan that a business sets about costs and revenue

Question 2

why do businesses use budgets?

Answer 2

-to ensure no department spends more than the company expects (controlling income and expenditure)
-to enable spending power to be delegated to local managers (improve decision making speed)
-budgets can help motivate staff to hit targets

Question 3

what does planning and monitoring involve?

Answer 3

business can use budgets to plan ahead and decide if they can afford spending more or expanding. problems can be identified, to allow the business to be successful.

Question 4

why is having control over budgets important?

Answer 4

frequent monitoring allows precise control over their functional areas
-can be used to review the company or department objectives

Question 5

how do budgets help coordination and communication?

Answer 5

budgets require different parts of a business to operate as part of a coordinated whole
-they can be communicated throughout the organisation
(helps aid decision making)

Question 6

how do budgets help motivation and efficiency?

Answer 6

target -setting and performance can be measured by managers
-the allocation of budgets spreads decision making across the organisation, acting as a motivator to the managers who control them.

Question 7

how are budgets set?

Answer 7

they are set manually and monitored monthly

Question 8

types of budgets

Answer 8

historical figure budgets and zero based budgeting

Question 9

historical figure budgets

Answer 9

based on historical data and allow for factors such as inflation and other relevant economic indicators.

Question 10

zero based budgeting

Answer 10

not allocating budgets to departments, this can control costs more
-requires all spending to be justified, this can be time consuming though
-requires skilled and confident employees to make a persuasive case to convince purchasing decision- makers

Question 11

budget variance

Answer 11

a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period

Question 12

what does variance analysis seek to determine?

Answer 12

the reasons for the differences in the actual vs budgeted figures

Question 13

what is a favourable variances
+examples

Answer 13

is where the actual is better than the budgeted figure
(f)
- revenue or profit has a higher actual than budgeted figure
- costs have a lower actual than budgeted figure

Question 14

what is an adverse variance

Answer 14

where the actual figure achieved is worse than the budgeted figure
(a)
- revenue or profit has a lower actual than budgeted
- costs have a higher actual over budgeted figure

Question 15

what can a business do after a variance has been identified?

Answer 15

they should carefully investigate the reasons why they have occurred and take appropriate action

Question 16

give some difficulties of budgeting?

Answer 16

-leads to competition and conflict
-takes time and skill to set, monitor and review
-if the data is inaccurate, the construction may not be good
-budget setters may have bias and influence over it
-unachievable budgets can cause a lack of motivation
- budgeting can encourage managers to focus on the short-term rather than long-term performance

Question 17

what two things are budgets set for?

Answer 17

income and expenditure

Question 18

what are income budgets?

Answer 18

they set targets for the value of sales to be achieved

Question 19

what are expenditure budgets?

Answer 19

they give budget holders a limit under how much their department costs can be

Question 20

give some solutions to budget variances

Answer 20

-change budgets
-train staff to improve revenue and productivity
-reward staff to motivate them
-change suppliers
-new marketing tactics to increase promotion and sales
-review product portfolio, potentially lose low performing products
-reallocate budgets to departments producing favourable numbers