Budgets

Question 1

What is a budget?

Answer 1

a financial plan for the future concerning revenues and costs of a business

Question 2

How are budgets prepared and compared?

Answer 2

budgets for revenue and costs are prepared in advance and then compared with actual performance to establish any variances

Question 3

How do managers manage a budget?

Answer 3

managers take remedial action if the adverse variances are regarded as excessive.

Question 4

What is a favourable variance?

Answer 4

a variance in a budget that leads to a higher than expected profit based off of the actual performance and budgeted figure

Question 5

What is an adverse variance?

Answer 5

a variance in a budget that leads to reduced profit and the actual budget is more than the budgeted figure.

Question 6

How is a budget useful?

Answer 6

used to measure success/performance
used to motivate staff
used to prevent over-spending
set targets/objectives/aims
minimum target in revenue for employees to meet 
clear spending decisions
used in cash flow forecasts
improve efficiency
allocate resources
assign responsibilities
Justify spendable

Question 7

How do you construct a budget?

Answer 7

Historical

Zero-based

Question 8

What are the types of a budget?

Answer 8

Revenue
Expenditure
Profit

Question 9

What is a historical budget?

positive and negative?

Answer 9

Treating last year expenditures and budgets as a main determinant of this years budget
+ more realistic
- accuracy as circumstances may have changes (ie inflation rates)

Question 10

What is a zero-based budget?

positive and negative?

Answer 10

When each department has a budget of zero and managers must justify each pound they require/spend.
+ realistic, up-to-date (proposals)
- time consuming, slow and complicated

Question 11

What is a revenue budget?

Answer 11

A forecast of sales revenue and expenditure which will be generated.

Question 12

What is the expenditure budget?

Answer 12

A budget that keeps track of purchases and operating costs within a business and general overhead fixed costs

Question 13

What is a profit budget?

Answer 13

Based on the sales/revenue and costs budget
= revenue-costs
Of great interest to stakeholders
may form the basis of performance budget.

Question 14

What are some issues with constructing an accurate budget?

Answer 14

• consumer trends -> sales figures
• market fluctuations -> dynamic
• competitor actions -> innovation
• availability of raw materials
• External factors: P.E.S.T.L.E
  inflation, costs, economy
• unforeseen costs
• industrial action (trade union)
• staff retention

Question 15

What is PESTLE?

Answer 15

Political
Economic
Social
Technology
Legal/Legislation
Environment
External factors that impact any business decision.

Question 16

What does a budgeting system give a company?

Answer 16

• measure success
• track current spend
• provide direction
• delegate power in spend

Question 17

What is a yardstick?

Answer 17

a standard which can be used to judge success or value of something

Question 18

How can a yardstick be used?

Answer 18

used to motivate staff and measure success and eliminate problems

Question 19

What does a zero-based budget allow a business to do?

Answer 19

flexible, realistic, disciplined, efficiency, justify spending

Question 20

How do businesses set next years budget?

Answer 20

By using historical and zero-based budgets.
Looking at the market and likely figures
Research potential costs
P.E.S.T.L.E

Question 21

What are budget holders and why are they important?

Answer 21

budget holders are members in an organisation that has been empowered with the task to allocate funds to resources and justify reasons for getting assets

Question 22

How may a firm respond to a adverse cost?

Answer 22

make staff efficient
invest into machinery
reducing wages
making staff redundant

Question 23

How may a manager improve the sales accuracy?

Answer 23

identify trends
factor in PESTLE
consult with staff
improved technology

Question 24

How do businesses create budgets?

Answer 24

1) analysis of market fluctuations to predict future into revenue budget
2) research costs labour, fuel and supplies and contracting suppliers - useful for expenditure budget
3) consider government estimates for :
inflation, interest, wage rises incorporating into revenue and expenditure budgets.

Question 25

What is variance analysis?

Answer 25

Calculating and investigating the differences between actual results and the budget.

Question 26

When do variances arise?

Answer 26

variances arise when there is a difference between an actual figure and budgeted figure.

Question 27

What are the types of variances?

Answer 27

positive / favourable (better)

adverse / unfavourable (worse)

Question 28

What is common between the revenue, expenditure and profit budget?

Answer 28

They are all prepared in advance and then compared with actual performance to establish any variances.

Question 29

What do adverse and favourable budgets depend on?

Answer 29

Whether the process was a cost or revenue

Question 30

What are budget holders?

Answer 30

is a member of staff who has been assigned a budget for a particular activity

Question 31

What is budgetary control?

Answer 31

is the process by which financial control is exercised within an organisation.

Question 32

Why should budget holders have a say in setting budgets?

Answer 32

There experience and knowledge about the department in general
Easily allocate funds and resources in the required places.

Question 33

How are variances calculated?

Answer 33

By comparing the actual data to the forecast data.