3.9 - Budgets (HL - Unit 3) Flashcards
What is a budget?
- A plan for future finances, including the income received and the planned spending
- Helps in identifying financial issues and setting targets.
What should be included in a budget?
Predicted income sources and predicted expenses
This includes forecasts for the next week, month, or year.
How can a budget help in financial planning?
It can help identify possible problems, set targets, and make spending decisions
For example, budgeting for a cinema trip.
Variances
Differences between the budget number and the actual number
Variances can be favorable or adverse.
Favorable
Actual income > budgeted income
Actual expenditure < budgeted expenditure
This is considered a positive outcome.
Adverse
Actual income < budgeted income
Actual expenditure > budgeted expenditure
This is considered a negative outcome.
Pros of budgeting
- Planning for the future
- Effective allocation of resources
- Controlling spending
- Assessing performance
These benefits help in managing finances effectively.
Cons of budgeting
- Lack of flexibility
- Short-term focus
- May lead to unnecessary spending
These limitations can affect the overall effectiveness of a budget.
What is a cost centre?
A section of the business to which costs can be allocated
Example: Hotel cleaning or reception desk.
What is a profit centre?
A section of the business to which revenue and costs can be allocated
Example: Hotel restaurant or bar.
Pros of profit/cost center
- Responsibility may improve motivation
- Can identify poor performing areas
- Used to reward strong performers
These aspects can enhance business operations.
Cons of profit/cost center
- Managers prioritizing their part over business.
- Some costs can‘t be allocated anywhere (e.g. lighting of the hotel)
This can lead to neglecting broader business interests.
