Budgeting

Question 1

Budgeting

Answer 1

The process of producing a budget.

Question 2

Budget

Answer 2

A financial plan that is prepared and agreed in advance. It relates to a defined period of time.

Question 3

Advantages of a budget

Answer 3

Compare performance with budget targets
Anticipate problems and find solutions
Co-ordinate different parts of the business as it grows
Communicate objectives of the business to it’s employees
Give control to those who are best able to make decisions
Workers work harder from fear of failing to reach set objectives

Question 4

Disadvantages of a budget

Answer 4

Unaccurate or unrealistic budgets will be useless
The firm could lose potential business if not enough resources are allocated to a part of the budget
If managers aren’t in control of budgets they may have little incentive to stick to targets

Question 5

Stakeholder

Answer 5

Any individual or group which is affected by a business and so has an interest in its activities.

Question 6

Variance =

Answer 6

Actual level - planned level

Question 7

Variance

Answer 7

The difference between the figure that a business has budgeted for and the actual figure.

Question 8

A good and a bad variance

Answer 8

Favourable variance
Adverse variance

Question 9

Why might a variance occur?

Answer 9

Inflation
Changes in tax
A pessimistic sales forecast (may be indicative of poor financial planning)
Therefore, we cannot always assume that a firm is healthy and performing well if they show favourable variances