budgeting Flashcards
What is a budget?
A financial plan for the future. Without one, businesses and individuals can get into financial trouble.
What is a sales revenue budget?
Sets out a business’s planned revenue from selling its products
What is an expenditure budget?
Sets out a business’s planned spending on labor, raw materials, fuel, and other essential production items.
What is a variance in budgeting?
- Any unplanned change from the budgeted figure.
- Occurs when actual figures for sales or expenditure differ from budgeted figures.
- Can be favorable (F) or adverse (A).
What is a favourable variance?
When the difference between actual and budgeted figures results in higher profits than budgeted
What is an adverse variance?
When the difference between actual and budgeted figures results in lower profits than planned.
What is zero budgeting?
- Managers start with a “clean sheet” and must justify all expenditure.
- This improves control, resource allocation, limits unjustified budget increases, reduces unnecessary costs, and motivates managers to seek alternatives.
Examples of reasons for favourable SALES variances.
- Effective bonus schemes
- successful advertising
- favourable weather
- demise of a competitor.
Examples of reasons for adverse SALES variances.
- Successful competitors
- lost contracts
- ineffective advertising,
- bad weather
- recession
Examples of reasons for favorable COST variances.
- Better trained/motivated workers (improved productivity)
- reduced import costs (stronger currency)
- falling raw material costs.
Examples of reasons for adverse COST variances.
- Worker strikes
- currency devaluation
- unexpected supplier price rises.
Advantages of budgeting.
- control income and expenditure
- regulate spending
- provides clear targets
- can motivate
Limitations of budgeting.
- time consuming
- poor budgets lead to poor decisions
- lose significance if figures are different
