Budgets 2.2.4

Question 1

what is a budget

Answer 1

a target for costs or revenues that a business/department must aim to reach over a given period

Question 2

what is the purpose of budgeting (4 reasons)

Answer 2

1. ensure that a department doesn’t spend more than expected/covered
2. to prove a manager’s success or failures
3. to give local managers a set amount to use in the way they think is best, which speeds up decision making
4. help to motivate staff to try and hit targets in hope for a raise

Question 3

what is the income budget

Answer 3

a target for the amount of sales that need to be achieved

Question 4

what is an expenditure budget

Answer 4

a limit which managers in each department need to stay under

Question 5

what are historical budgets

Answer 5

budgets determined on the previous year’s budget (with a few minor changes due to inflation and other foreseeable changes)

Question 6

what are zero-based budgets

Answer 6

budgets set at 0 for each department, with each manager asking for a set amount and having to justify all of it (to help avoid budgets creeping up every year)

Question 7

what does variance analysis involve

Answer 7

looking back at budgets to calculate the difference between the budgeted figure and the actual figure

Question 8

what is a favourable variance

Answer 8

one that leads to a positive for the company (e.g. revenue up, costs down)

Question 9

what is an adverse variance

Answer 9

one that reduces the company’s profit (e.g. revenue down, costs up)

Question 10

what must a business do once a variance has been identified

Answer 10

identify its cause, consider its effect, if appropriate look for a solution

Question 11

solutions to budget variances (6) - Budgeting’s Tough Remember, Slay Miss Perfect

Answer 11

• change budgets
• train staff
• reward staff
• change suppliers
• new marketing tactics
• review product portfolio

Question 12

difficulties of budgeting (4) - CRUC

Answer 12

• costs can change
• hard to ensure they are realistic
• lack of understanding of variances
• competitors impact growth

Question 13

advantages of budgeting

Answer 13

• provides a quantifiable way to measure if targets are being achieved and the business is operating effectively
• informs decision making
• motivates managers due to their increased responsibility

Question 14

disadvantages of budgeting

Answer 14

• there is potential for conflict because targets may be unachievable
• time consuming to set and monitor

Question 15

how to budget effectively

Answer 15

• set budgets which assist the business not ruin it
• set demanding but realistic targets to keep workers motivated
• review budgets and progress frequently to adjust them