2.2.4 Budgets

Question 1

What is the purpose of budgets?

Answer 1

Financial plan that a business sets about costs and revenue

Budgets are essential for planning and monitoring financial performance.

Question 2

List the reasons for creating budgets.

Answer 2

• Planning and monitoring
• Control
• Coordination
• Motivation and efficiency

Question 3

What is a zero based budget?

Answer 3

Requires all spending to be justified and is useful to control costs closely

Zero based budgets eliminate unnecessary costs but can be time-consuming and require skilled employees.

Question 4

What is variance analysis?

Answer 4

Difference between a figure and actual figure achieved by end of a specific time period

Question 5

Define favourable variance.

Answer 5

Actual figure achieved is better than budgeted figure

Question 6

Define adverse variance.

Answer 6

Actual figure achieved is worse than budgeted figure

Question 7

What are historical figure budgets based on?

Answer 7

Based on historical data from previous years

Historical figure budgets must allow for factors such as inflation and other relevant economic factors.

Question 8

What difficulties can arise from budgeting?

Answer 8

• Encourages short-term focus
• Unachievable or unambitious budgets can demotivate
• Budget-setters influence budget setting and review
• Inaccurate data renders budgets useless
• Time and skill required for setting, monitoring, and reviewing
• Can lead to competition and conflict between business functions

Question 9

Fill in the blank: The budgeting process can lead to _______ between different business functions.

Answer 9

[competition and conflict]