Budgets(HL) Details Flashcards
Each profit centre contributes to the overall profits of the business(T/F)
True
Cost centres are responsible for predicting and managing their own operational costs(T/F)
True
Benefits of profit and cost centres
-Allows businesses to clearly see how their departments are performing
-Providing local discretion over financial management can motivate employees and managers
Budgets are generally short-term and coordinated(T/F)
True
Factors to consider when constructing a budget
-Changes to marketing decisions(regarding the seven Ps of the marketing mix)
-Labour turnover issues(may affect salaries and/or recruitment and training costs)
-Operation changes(may affect efficiency and waste)
-STEEPLE factors
Elements of a budget
Budgeted figures, actual figures and variance regarding the following variables:
-Total income(including components)
-Total costs(including components)
-Net income
Format of a budget
Formula for net income
Total income - Total costs
Formula for variance
Actual figures - Budgeted figures
What does [F] mean in budgets?
Favourable budget variance
What does [A] mean in budgets?
Adverse budget variance
Types of variance
-Favourable variance
-Adverse variance
-No variance
A favourable variance can happen when…
-The actual costs are lower than the budgeted costs
-The actual income is higher than the budgeted income
An adverse variance can happen when…
-The actual costs are higher than the budgeted costs
-The actual income is lower than the budgeted income
There is no variance if…
the actual cost/income is the same as the budgeted cost/income
An adverse cost variance is always a bad thing
NO!!
If variable costs have increased as a result of increased sales, most managers would happily pay this cost as long as there is enough working capital
Benefits of budgeting
-It helps businesses plan for the future by estimating the financial resources needed to complete a particular objective
-It helps the business to evaluate the performance of departments or managers(by testing their ability to stay within the budget)
-It allows businesses to better coordinate the allocation of their funds to different departments
