budgeting Flashcards
What is a budget?
It is a financial PLAN which shows specific OBJECTIVES that a business hopes to achieve over a given period of TIME.
State 3 different budgets.
Production budget
Sales budget
Cash budget
Define a forecast.
A forecast is a prediction of the results of operations within the business over a period of time.
State 3 categories of budgets.
Fixed budget
Flexible budget
Zero-based budget
Explain the differences between the CATEGORIES of budgets.
A fixed budget is one that is constant even if the activity level of the firm is different from the projected
figures. A flexible budget is similar to this but it is adjusted when there are changes to activity levels. However, zero-based focuses on the most important goals rather than factors that affects activity levels.
What are the TYPES of budgets
Sales
Production
Material
Labour
Explain a sales budget
It is a plan showing forecasted sales for the period. The forecasted sales are often arrived at from historical data and current and expected economic patterns.
Explain a production budget
the production budget refers to the determination of the products to be produced during a particular period of time.
Explain a material budget
outlines the estimated quantities and costs of raw materials needed to meet planned production targets
Explain a labour budget
a financial plan that estimates and controls the cost of labor resources over a specific period, usually a year
What is a variance analysis and what is its purpose?
Variance analysis is the process of examining how and why actual figures for costs differ from its budgeted cost.
The main purpose for variance analysis is to provide management with practical reasons for below par performance
Outline the difference between an favorable and adverse variance.
A variance is favorable when the actual figures are higher than budgeted. However, a variance is adverse when the actual figures are lower than the budgeted.
A variance can be caused by a number of factors, some of which are:
-Poor budgeting – this is where management makes impractical and ill-advised estimates, resulting in cost overruns
-Changes in the price of inputs (for example, materials). This could result in higher than budgeted costs
-Unpredictable events such as natural disaster can halt production, causing variance in sales and production
-Improper recording of data, costs or revenue could misrepresent the accounts and cause variances.
State the types of variances.
Sales
Labour
Direct material
