Budgets Flashcards
What is a budget?
A plan agreed in advance based on the firms objectives
The target for cost revenue firm or Dalma must aim to reach over given period of time
What are the types of budget?
Revenue/earning budget
expenditure budget and
profit budget
Describe revenue/earning budget
Sets out the business expected revenue from selling its products
Need to know the selling price and expected demand
Much easier to predict for an established business as they can go past of new businesses can find it hard to predict accuracy
Describe expenditure budget
Also referred to as cost or production budget
Sets out expected expenditure on a monthly basis for item such as advertising
Describe profit budget
Obtained by adding expenditure and revenue budget
It’s important to many step stakeholders for example shareholders, bank( for loan
How can a business carry out research to construct a budget?
They can analyse the markets to predict trends and sales and prices (market research)
Research cost for labour fuel and raw materials by contacting suppliers – explore possibilities for discounts for prompt payment or ordering in bulk
Government predictions for forthcoming wages rises, inflation etc (using secondary data)
7 what are the stages of setting budget?
State objectives
gather information
sales budget
production budget of cost/expenditure budget profit and cash budget
Why do you produce the sales budget first?
So the business knows how much of the raw materials they need and they need to know demand but this tells you how much items you need to make to satisfy demand
Why do you use production/expenditure budget after the sales budget?
Need to know the total cost before doing these budges
How do you get the sources of information for budgets?
Previous trading record
Market research – essential and fast changing market
Government agencies – info advice
Why is it harder for new firms to set budget?
They don’t know the demand and don’t have previous trading records as well as the lack of experience in in the market
What are the stages in budgetary control
Prepare budget
Compare budget with the actual result
Analyse the difference (variance)
How do you analyse a budget in an actual expenditure?
You look at how successful the business has been at controlling costs
It occurs regularly is a budget achievable?
If one area of the business is regularly overspending – identify this and take act ion
How do you analyse revenue data?
If you’ve not achieved, you must identify the reason
What are the possible reasons for not achieving the revenue you want in your revenue data?
Prices are too high
Lack of advertising
Insufficient quality
How do you analyse profit budget?
Profits less than budgeted amount or concern for shareholders, managers, potential investors and banks. This could be due to excess expenditure shortfall of budgeted income or combination of the two.
Define variance
Vance is when an actual figure is different to the budgeted figure
Define favourable variance
When the difference between actual figure and budget figures results in a higher profit (actual sales revenue> budgeted sales revenue or actual< budgeted expenditure)
What are the possible causes for favourable variances for sales?
Higher than expected
Competition could’ve closed down
Economic boom
What are the possible causes for favourable variances for expenditure?
They are lower than expected, and the supplier could’ve given them a bulk buying discount or the exchange rate could’ve changedI
Define adverse variances
When the difference between actual and budget figures resorts in lower profit standards planned (actual sales revenue< budgeted sales revenue or actual expenditure> budgeted expenditure)
What are the possible causes of adverse variances for sales/expenditure?
For sales they are lower than expected and this could be due to negative publicity or product recall
Expenditure is higher than expected and this could be due to inflation going up so wages increases
What are the benefits of variance analysis?
Provides advance notices that forecast are in accurate allowing managers to make decisions to improve performance at an early stage
If sales are favourable equals positive impacts and profits may run out of stock to meet future customer requirements – losing customers in this way is very undesirable so to plan expansion of operations for example take on temporary state
What are the advantages of budgetary control?
Allows to measure success
Spending power can be delegated to local managers – manager retains responsibility for outcome so motivate staff
Direct extra fund into important areas of the business
Allows business to conduct variance analysis
It shows no one spend more than the firm expect – prevent unpleasant surprise at the end of the year
Describe how effective budgeting is
Well, to be effective, the budgets are constructed to assist a business in achieving its financial and wider objectives e.g. if you have a group of objective this equals expenditure budgets that allow expansion
Targets need to be demanding to encourage efficiency but also needs to be achievable
Budget should be reviewed frequently
Define zero budgeting
Prevents budgets creeping up each year by setting budgets at0
Advantages and disadvantages of zero budgeting
Pro
Ensures more effective budgets
Cons
Some people are better at negotiating than others
Time consuming
Disadvantages of budgetary control
Training is required in order for employees to manage budgets effectively
Difficult to set for first time budgets
Unexpected changes can effect revenue and expenditure
Decisions sometimes made to stick to budget but are not in the long term interests of the business
How can businesses be more effective ?
More likely to be effective if the budgets are constructed to assist the business in achieving it financial and wider objectives
Targets need to be demanding to encourage efficiency but also need to be achievable
Budgets should be reviewed frequently
Variance equation
Actual-budgeted
