2.2.4 Budgets

Question 1

What are Budgets?

Answer 1

Budgets are forecasts or plans for the future finances of a business

Question 2

What can be Budgeted?

Answer 2

Income
Expenditure
Profit

Question 3

What is the purpose of setting budgets?

Answer 3

Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured

Helps with planning and forecasting to inform decision making

Motivates budget holders due to increased responsibility

Question 4

What is an Income budget?

Answer 4

a target set for the amount of revenue to be achieved in a set time period

informs predicted cash inflows in the cash flow forecast

Question 5

What is an Expenditure budget?

Answer 5

a limit placed on the amount to be spent in a given period of time

can be split by department, function or product

allows for monitoring of under spending as well as overspending

Question 6

What is a Profit budget?

Answer 6

a target set for the surplus between income and expenditure in a given period of time

calculated based upon the income and expenditure budget

will be used to inform decision making on products as well as where cuts may need to be made

Question 7

What are two types of Budgets?

Answer 7

Historical figures

Zero based

Question 8

What is Zero based budgeting?

Answer 8

Setting a budget of zero

All departments have to justify any requests for expenditure

Question 9

What are posotives/negatives of Zero based budgeting?

Answer 9

Time consuming but flexible and can reduce waste

Question 10

What are posotives/negatives ofHistorical figure basedbudgeting?

Answer 10

Can be linked to the ability to meet objectives
Can be incremental i.e. last year plus a %
Can be adjusted in line with actual outcomes e.g. if a budget was underspent should it be set lower this year?

Question 11

What is Historical figure based budgeting?

Answer 11

Setting budgets based on the previous year’s budget

Question 12

What are some advantages of budgets?

Answer 12

An advantage of budgets is that they allow for monitoring of performance

Question 13

What are diffrences between the budget and the acctual ammount called?

Answer 13

Any difference is known as a variance

Question 14

What is Variance Analysis?

Answer 14

Variance Analysis is the process of calculating and interpreting the difference between the budgeted and actual figure

Question 15

What are some ADVERSE variances for a business?

Answer 15

Expenditure higher than budget
Income lower than budget
Profit lower than budget

Question 16

What are some FAVOURABLE variances for a business?

Answer 16

Expenditure lower than budget
Income higher than budget
Profit higher than budget

Question 17

What does Adverse and Favourable mean?

Answer 17

An adverse variance is one that is bad for the business

A favourable variance is one that is good for the business

Question 18

What are some causes of variance?

Answer 18

Action of competitors (Lower prices, Introduce a new product, Close a store)

Action of suppliers (Change prices, Offer a discount)

Changes in the economy (Change in interest rates, Increase to minimum wage)

Internal inefficiency

Internal decision making

Question 19

What are some Difficulties of budgeting?

Answer 19

Dependent upon predictions and forecasts
Costs are subject to change
Actions of competitors are unknown
Managers may lack experience
May be subject to bias
Take time and effort which itself has an associated opportunity cost