Budgets 2.2.4 Flashcards
Define a budget.
A financial plan for future setting targets to be met and how spending is financed.
What are the 4 purposes of a budget?
- Guide of what firm want to achieve.
- Help control expenditure.
- Communication.
- Forecasting.
- Motivate the workforce.
How are profit budgets constructed?
- Analyse market
- Draw up revenue budget
- Draw up costs budget
Define extrapolation.
Use of past data to establish a trend which is then projected into the future.
Define zero-based budgets.
A method of budgeting in which all expenses must be justified for each new period.
What are the difficulties of budgeting?
- Dependent upon predictions and forecasts.
- Are only as good as the data being used.
- Costs are subject to change
- Actions of competitors are unknown.
- Managers may lack experience.
- May be subject to bias.
- Take time and effort which itself has an associated opportunity cost.
What are the benefits of budgeting?
- Helps foresee the unexpected.
- Allows efficient allocation of resources.
- Gives direction/coordination.
- Motivates staff (used as targets)
= work harder, increase productivity. - Improves efficiency.
- Assists in forecasting & future planning.
What can be budgeted?
Sales budgets
Expenditure budgets
Profit budgets
What are sales/ income budgets?
A financial plan that estimates a company’s total revenue in a specific time period. It focuses on two things—the number of products sold and the price at which they are sold—to predict how the company will perform.
What are expenditure budgets?
A target set for the surplus between income and expenditure in a given period of time. It’s calculated based upon the income and expenditure budget.
What are profit budgets?
Shows the expected income, expenditure and profit over the budget period. It tells you how much profit is likely from your expected level of trading.
What is variance analysis?
Involves calculating and investigating the differences between actual results and the budget.
Describe adverse variance.
• An adverse variance is one that is bad for the business.
• Expenditure higher than budgeted.
• Income lower than budgeted.
• Profit lower than budgeted.
When the actual figures are worse than the budgeted figures.
Describe favourable variance.
• A favourable variance is one that is good for the business
• Expenditure lower than budgeted
• Income higher than budgeted
• Profit higher than budgeted
What are the causes of favourable variance?
- Stronger demand than expected= higher actual revenue.
- Selling prices increased higher than budget.
- Cautious sales and cost assumptions.
- Better than expected productivity or efficiency
