2.2.4 Budgets Flashcards
1
Q
The purpose of budget
A
- Planning & monitoring
- used to actively plan ahead
- problems and their solutions may be considered and solved in advance - Control
- allows managers to precisely control their functional area
- supports the setting and review of company or department objectives - Coordination & communication
- requires different parts of a business to operate as part of a coordinated whole - Motivation & efficiency
- play an important role in target-setting and performance
2
Q
Types of budgets
A
- usually set annually then monitored monthly
Historical figure budgets:
- budgets are usually based on historical data and allow for factors such as inflation and other relevant economic indicators
Zero based budgeting: useful where a business needs to control costs closely
- requires all spending to be justified, which means that many unnecessary costs can be eliminated
- can be time consuming as evidence to support spending decisions needs to be collected and presented
3
Q
Variance analysis
A
- a budget variance = a difference between a figure budgeted and the actual figure achieved
- variance analysis seeks to determine the reasons for the differences in the actual figures and budgeted figures
Favourable variance:
- the actual figure is better than the budgeted figures Favourable variance
Adverse variance:
- the actual figure is worse than the budgeted figures Favourable variance
4
Q
Difficulties of budgeting
A
- the budgeting process can lead to competition and conflict between different business functions
- budgets take time and skill to set, monitor and review
- the budget is only as good as the data used to construct it - inaccurate data renders budgets useless
- budgeting can encourage managers to focus on the short-term rather than the long term performance
- unachievable or an ambitious budgets can have a negative impact on motivation
- budget-setters have significant influence over the setting and review of budgets
