5 Budgets & Budgeting 40

Question 1

What is a budget ?

Answer 1

A budget is a financial plan for the focus concerning the revenues and costs of a business

Question 2

What are the main 2 approaches to budgeting ?

Answer 2

Historical budgeting

Zero budgeting

Question 3

Historical budgeting …

G/B

Answer 3

The use of last years figures as the basis for the budget

Realistic, based on actual results
However circumstances may have changed (new product)
Doesn’t encourage efficiency

Question 4

Zero budgeting …

G/B

Answer 4

Budgeted costs & revenues are set to zero

Based on new proposals for sales and costs
Makes budgeting more complicated & time-consuming but more realistic

Question 5

What are the types of Budget ?

And what is included in them ?

Answer 5

Revenue (or income) budget:
Expected revenues & sales
Broken into more detail (products, locations etc)

Cost budget:
Expected costs based on sales budget
Overheads and other fixed costs

Profit budget:
Based on the combines sales and costs budgets
Of great interest to stakeholders

Question 6

What are the limitations of using budgets ?

Answer 6

Can lead to inflexibility in decision-making
Need to be changed as circumstances change
Are only as good as the data being used to create them
Can be time-consuming