3.9 - Budgets

Question 1

what is a budget

Answer 1

a plan for the future finances of a company. this includes the income recieved and the planned spending

Question 2

pros/cons of budgeting

Answer 2

pros
* can help predict any cash flow problems in the future
* it can help set targets
* it can help to make decisions about what to spend money on
* can support in telling if a business is successful or not

cons
* may be unrealistic
* there maybe big changes
* may lead to unnecessary spending
* very short-term thinking
* lacking in flexibility

Question 3

what is a variance in terms of budgeting?
explain variance

Answer 3

the difference between the amount budgeted and the actual amount that is spent/earned

a variance can be adverse/favourable
* when a source of revenue is greater than the budget it is favourable
* when it is less - it is adverse

Question 4

what are the headers of a table when constructing a budget

+ what other sections are needed in a budget? (in items) - what always stays the same

Answer 4

1. items
2. budgeted for next year
3. actual
4. variance
5. adverse/favourable

+ needed sections
* total income
* total expenditure
* profit

Question 5

what are cost centers

Answer 5

a section of a business where a cost can be allocated

(eg. within a hotel - receptionist and cleaners)

Question 6

what are profit centers

Answer 6

sections of a business which revenue and costs can be allocated

(eg. hotel - restaurant and bar - waitors but also sell food)

Question 7

why are cost/profit centers important/what is one limitation?

Answer 7

• it can highlight which areas of a business are weak (less expenses or more revenue)
• can reward strong performers
• responsibility can motivate the employees

BUT
* they may feel as if their section of the business is the only one and they may not focus on the business as a whole
* also sometimes things may not directly be allocated to one or another