Budgets Flashcards
What is the definition of budgets?
A financial plan for the future concerning the revenues and costs of a business
Name 3 uses of budgets in management
- Establish priorities & sets targets
- Motivates staff
- Improve efficiency
What are the two main approaches to budgeting?
Historical budgets & Zero-based budgets
What are historical budgets?
The use of last year’s figures as the basis for the budget
What are Zero-based budgets?
Budget is based on new proposals for sales and costs ie. built front the bottom up
What are the three main types of budget?
- Revenue (or income) budget
- Cost (or expenditure) budget
- Profit budget
Definition of Variance Analysis
Calculating and investigating the differences between actual results and the budget
What are favourable variances?
- Actual figures are better than budgeted figures
- Eg costs lower than expected
- Eg revenue/profit higher than expected
What are adverse variances?
- Actual figure worse than budget figure
- Eg costs higher than expected
- Eg revenue/profit lower than expected
Causes of favourable vaiances
- Stronger market demand than expected
* Competitor weakness leading to higher sales
Causes of adverse variances
- Unexpected events
- Sales-forecast prove over-optimistic
- Over-spends by budget holders
What are the problems are limitations of budgets?
- Can lead to inflexibility in decision-making
- Takes time to complete and manage
- Need to be changed as circumstances change
