3.9 Budgets

Question 1

Budgets

Answer 1

A financial plan of expected revenue or expenditure for a period of time in the future

Question 2

Importance of budgets

Answer 2

Planning (plan for future + anticipate financial problems before they occur)
Control (keeps managers accountable for their spending - limited in their expenditure)
Motivation (involving staff in budgeting process can boost moral)

Question 3

Cost center

Answer 3

A section of a business where costs are incurred and recorded (helps firm be aware of their contribution towards expenditure)

Question 4

Profit center

Answer 4

A section of a business where both costs and revenue are identified and recorded (helps firm be aware of the areas that make the most/least amount of profit)

Question 5

Variance

Answer 5

The different between the budgeted figure and the actual figure

Question 6

Favorable variance

Answer 6

The variance is beneficial to the business

Question 7

Adverse variance

Answer 7

The variance is detrimental to the business

Question 8

Role of budgets in strategic planning

Answer 8

Allows businesses to minimize losses/wasted resources
Objective way to appraise budget holders for their departments
Inflexible budgets that don’t consider external factors are difficult
Budget surpluses can be wasted