3.9 Budgeting Flashcards
What is the definition of a “budget”?
A budget is a detailed financial plan for the future, usually involving the expected costs and revenues or a cash flow forecast, for a pre-determined period of time.
What are some things a business “budget” include? (5 things)
- Planning
- Contingency planning
- Accountability
- Financial control
- Efficiencies
What does “planning” refer to in a business “budget”?
Budgeting is essentially about financial planning. Business strategy and operations cannot happen without the necessary finances. Budgeting helps managers to plan their operations and strategies based on the available finances in the budget.
What does “contingency planning” refer to in a business “budget”?
Budgeting allows a business to plan to put aside money for emergency use. This helps a business to be better prepared for any unexpected costs or unplanned expenditure.
What does “accountability” refer to in a business “budget”?
Budgets limit how much money can be spent on certain business operations, thereby making people accountable for their decisions and expenditure. Budgeting helps to ensure that money is not wasted on non-essential items.
What does “financial control” refer to in a business “budget”?
Budgeting enables managers to better understand possible financial problems in order to take corrective measures.
What do “efficiencies” refer to in a business “budget”?
Budgeting forces businesses to prioritise their items of expenditure in order to achieve the organization’s goals. Decision makers are more careful with their budgets, thus make efficiency gains for the business.
What is a “cost centre”?
A cost centre is a division of a business that has responsibility for its own operational costs. The cost centre is held accountable for its departmental expenditure.
Cost centres do not specifically generate any revenue but their operations contribute to the overall costs of the organization.
What are some examples of “cost centres” in the corporate world?
- Customer service
- Human resources
- Legal
- Marketing
- Production
- Purchasing
- Research and development (R&D)
- Technical support
What is a “profit centre”?
A profit centre is a division of a business that has responsibility for both costs and revenues generated within the department. Hence, each profit centre is held accountable for the amount of profit made.
(eg. Google is the profit centre of Alphabet Inc.)
What is a “variance analysis”?
A variance refers to a discrepancy between the planned (budgeted) item of expenditure or revenue and the actual amount.
What are the two possible “variances”?
- Favourable variance
- Adverse variance
What is a “favourable variance”?
Favourable variance occur when profits are higher than expected (due to lower than expected costs and/or higher than predicted revenues).
What is an “adverse variance”?
Adverse variances occur when profits are lower than expected. This is due to costs being higher than expected and/or revenues being lower than predicted.
