Finance - Budgets and Variance

Question 1

What is a budget?

Answer 1

an estimate of income and expenditure for a set period of time

Question 2

What is a variance?

Answer 2

the difference between a budgeted figure and the actual figure

Question 3

What is the difference between a favourable and adverse variance?

Answer 3

Favourable is where revenue is higher than expected and expenditure is lower than expected, adverse is where revenue is lower than expected and expenditure is higher than expected

Question 4

What should you consider when analysing a variance?

Answer 4

• the size of the variance
• if its an anomaly or part of a serious trend
• only the most serious variances are worthy of extensive investigation to ensure the same mistakes aren’t repeatedly made

Question 5

What are some benefits of budgeting?

Answer 5

• enables clear targets to be established
• communication levels are strengthened as functional areas justify budgets
• helps tighten financial control over firms costs and revenue

Question 6

What are some problems with budgeting?

Answer 6

• Mistakes lead to poor allocation of resources
• Time consuming to complete
• Not tracking spending can lead to inaccurate budgets

Question 7

What is zero based budgeting?

Answer 7

This is where functional areas have to justify their budgetary requirements in order to get funding. This eliminates all inefficiencies of incremental budgeting