Chapter 32: Budgets

Question 1

Budget

Answer 1

A detailed financial plan for the future

Question 2

Uses of budgets

Answer 2

Setting targets
Planning
Allocating resources
Coordination
Controlling/monitoring a business
Measuring and assessing performance

Question 3

The three main types of budgets

Answer 3

Revenue
Cost
Profit

Question 4

Drawbacks of budgets

Answer 4

Lack of flexibility
Focus on short-term
Unnecessary spending if the budget was not surpassed
Training on the idea of budgets
Budgets for new projects is difficult, can be inaccurate

Question 5

Budget holder

Answer 5

The individual responsible for the initial setting and achievement of a budget

Question 6

Variance analysis

Answer 6

Calculation of the difference between budgets and actual figures, and the analysis of the reasons for such differences

Question 7

Delegated budgets

Answer 7

Budgets for which junior managers have been given authority for setting and achieving

Question 8

Incrimental budgeting

Answer 8

Uses last year’s budget as a basis, and an adjustment is made for the coming year

Question 9

Zero budgeting

Answer 9

Sets budgets to zero each year and budget holders have to argue their case for target levels and to receive any finance

Question 10

Flexible budgeting

Answer 10

Cost budgets for each expense are allowed to vary if sales or output vary from budgeted levels

Question 11

Favourable variance

Answer 11

A change from the budget that leads to higher-than-planned profit

Question 12

Adverse variance

Answer 12

A change from the budget that leads to lower-than-planned profit