Budgets

Question 1

What is a budget?

Answer 1

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

Question 2

What are the types of budget?

Answer 2

Revenue/earning budget
expenditure budget and
profit budget

Question 3

Describe revenue/earning budget

Answer 3

South business expected revenue from selling its products
Need to know the same 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

Question 4

Describe expenditure budget

Answer 4

Also referred to as cost or production budget
Our expected expenditure on a monthly basis for item such as advertising

Question 5

Describe profit budget

Answer 5

Obtained by adding expenditure and revenue budget
It’s important to many step stakeholders for example shareholders, bank( for loan

Question 6

How can a business carry out research to construct a budget?

Answer 6

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)

Question 7

7 what are the stages of setting budget?

Answer 7

State objectives
gather information
sales budget
production budget of cost/expenditure budget profit and cash budget

Question 8

Why do you produce the sales budget first?

Answer 8

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

Question 9

Why do you use production/expenditure budget after the sales budget?

Answer 9

Need to know the total cost before doing these budges

Question 10

How do you get the sources of information for budgets?

Answer 10

Previous trading record
Market research – essential and fast changing market
Government agencies – info advice

Question 11

Why is it harder for new firms to set budget?

Answer 11

They don’t know the demand and don’t have previous trading records as well as the lack of experience in in the market

Question 12

What are the stages in budgetary control

Answer 12

Prepare budget
Compare budget with the actual result
Analyse the difference (variance)

Question 13

How do you analyse a budget in an actual expenditure?

Answer 13

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

Question 14

How do you analyse revenue data?

Answer 14

If you’ve not achieved, you must identify the reason

Question 15

What are the possible reasons for not achieving the revenue you want in your revenue data?

Answer 15

Prices are too high
Lack of advertising
Insufficient quality

Question 16

How do you analyse profit budget?

Answer 16

Profits less Sam budgeted amount or concern for shareholders, managers, potential investors and banks. This could be due to access expenditure shortfall of budgeted income or combination of the two.

Question 17

Define variance

Answer 17

Vance is when an actual figure is different to the budgeted figure

Question 18

Define favourable variance

Answer 18

When the difference between actual figure and budget figures results in a higher profit (actual sales revenue> budgeted sales revenue or actual< budgeted expenditure)

Question 19

What are the possible causes for favourable variances for sales?

Answer 19

Higher than expected
Competition could’ve closed down
Economic boom

Question 20

What are the possible causes for favourable variances for expenditure?

Answer 20

They are lower than expected, and the supplier could’ve given them a bulk buying discount or the exchange rate could’ve changedI

Question 21

Define adverse variances

Answer 21

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)

Question 22

What are the possible causes of adverse variances for sales/expenditure?

Answer 22

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

Question 23

What are the benefits of variance analysis?

Answer 23

Advance advance notice at 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

Question 24

What are the advantages of budgetary control?

Answer 24

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

Question 25

Describe how effective budgeting is

Answer 25

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

Question 26

What is zero budgeting?

Answer 26

Managers must justify all of the money allocated to them to short allocations are

Question 27

Define zero budgeting

Answer 27

Prevents budgets creeping up each year by setting budgets at0

Question 28

Advantages and disadvantages of zero budgeting

Answer 28

Pro
Ensures more effective budgets

Cons
Some people are better at negotiating than others
Time consuming

Question 29

Disadvantages of budgetary control

Answer 29

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

Question 30

How can businesses be more effective ?

Answer 30

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

Question 31

Variance equation

Answer 31

Actual-budgeted