Budgets and Budgeting

Question 1

What is a budget?

Answer 1

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

Question 2

What are revised budgets?

Answer 2

Budgets for revenues and costs are prepared in advance and then compared with actual performance to establish any variances.

Question 3

What are managers responsible for regarding budgets?

Answer 3

Controllable costs within their budgets. They are also expected to take remedial action if the adverse variances are regarded as excessive.

Question 4

What are the uses of budgets in management?

Answer 4

• establish priorities and set targets.
• provide direction and co-ordination.
• assign responsibilities.
• control income and expenditure.
• allocate resources.
• motivate staff and improve efficiency.
• forecast outcomes.
• monitor performance.

Question 5

What are the principles of good budgeting?

Answer 5

• managers have a responsibility to adhere to their budget.
• performance is monitored against the budget.
• corrective action is taken if results differ significantly from the budget.
• unaccounted for variances are investigated.
• departures from budgets are permitted only after approval from senior management.

Question 6

What are the two main approaches to budgeting?

Answer 6

historical budgeting and zero budgeting.

Question 7

What is historical budgeting?

Answer 7

Uses last years figures as the basis for budget.

Question 8

What is the advantage of historical budgeting?

Answer 8

Realistic in that it is based on actual results.

Question 9

What are the disadvantages of historical budgeting?

Answer 9

• circumstances may have changed.
• does not encourage efficiency.

Question 10

What is zero budgeting?

Answer 10

budgeted costs and revenues are set to zero. budget is based on new proposals for sales and costs - built from the bottom up.

Question 11

What is the advantage of zero budgeting?

Answer 11

Potentially more realistic that historical budgeting as based on current predictions.

Question 12

What is the disadvantage of zero budgeting?

Answer 12

Makes budgeting more complicated and time-consuming.

Question 13

What are the three types of budget?

Answer 13

• revenue (or income) budget
• cost (or expenditure) budget
• profit budget

Question 14

What is revenue (or income) budget?

Answer 14

• expected revenues and sales.
• broken down into more details (eg products, location, etc).

Question 15

What is cost (or expenditure) budget?

Answer 15

• expected costs based on sales budget.
• overheads and other fixed costs.

Question 16

What is profit budget?

Answer 16

• based on the combined sales and cost budgets.
• of great interest to stakeholders.
• may form basis for performance bonuses.

Question 17

How is a profit budget constructed?

Answer 17

1.) Analyse market (market size, growth, share, prospects).
2.) Draw up sales budget (sales forecast, new products, pricing changes).
3.) Draw up cost budget (based on sales budget, allow for known changes in supplier prices, include contingencies).

Question 18

What are the key sources of information for budgets?

Answer 18

Financial performance in previous periods, and market research.

Question 19

How does financial performance in previous years help budgeting?

Answer 19

• particularly for established businesses.
• lots of relevant data likely to be available.

Question 20

How does market research help budgeting?

Answer 20

• trends in market size, growth, segmentation, product life cycles.
• competitor activity.
• customer feedback.

Question 21

What makes it difficult to budget accurately?

Answer 21

Sales forecasting and costs.

Question 22

How does sales forecasting make is difficult to budget accurately?

Answer 22

• harder when market experiences rapid change, eg technology.
• startup firms find it hard to estimate likely sales and revenues.
• competitor actions are difficult to predict.

Question 23

How do costs make it difficult to budget accurately?

Answer 23

• always likely to be unexpected costs.
• will vary depending on the sales budget.
• changes in external environment will impact costs, eg taxes, exchange rates.