Budgets and Budgeting

Question 1

Uses of budgets

Answer 1

• Establish priorities and set targets
• Provide direction and coordination
• Forecast outcomes
• Monitor performance

Question 2

Three main types of budgets

Answer 2

Revenue (or income) budget
Cost (or expenditure) budget
Profit budget

Question 3

How is a profit budget constructed?

Answer 3

• Analyse market (how has it changed, size and growth)
• Draw up revenue budget (sales forecast, new products, price change)
• Draw up cost budget (based on sales budget, allow for known changes in supplier budget)

Question 4

Limitations of budgets

Answer 4

• Are only as good as the data being used.
• Can lead to inflexibility in decision making.
• Take time to complete and manage