Budgeting

Question 1

What is a BUDGET?

Answer 1

A target for costs or revenue that a firm or department must aim to achieve over a given period of time.

Question 2

How to construct a budget?

Answer 2

• Make judgement of the likely sales revenue for the coming year

• Set a cost ceiling that allows an acceptable level of profit

• Budget for whole company’s cost is then broken down by division, department or branch

• Responsibility for achieving those budgets is then allocated

Question 3

How do you know what value to set a BUDGET?

Answer 3

• Guesstimate
- start-up company
- poor option

• Experience & Expertise
- better
- good if significant industry experience
- good of past data available

• Lots of market research

Question 4

What is a favourable variable for budget?

Answer 4

Good effect on profit

Question 5

What is an adverse variable for budgets?

Answer 5

Bad effect on profit

Question 6

What are the PROS of BUDGETING?

Answer 6

• Help to control finances and prevent overspending

• Budget can motivate staff if they are challenging but achievable

• Allocates control to the people best suited to know where to spend the money

• Tracking variances allows corrective action to be taken.

Question 7

What are the CONS of BUDGETING?

Answer 7

• Training should be provided if budgeting responsibility is delegated

• Allocating budgets and targets may be difficult and unlikely to please everyone

• Short-term target, may encourage employees to make decisions that are harmful to the long-term