financial planning

Question 1

break even

Answer 1

describes a position where a business is selling just enough to cover its costs without making a profit

Question 2

formula for break-even

Answer 2

fixed costs / (selling price - variable cost per unit) - also known as contribution per unit

Question 3

what else can break even be illustrated on?

Answer 3

a break-even chart

Question 4

margin of safety meaning

Answer 4

the horizontal difference between the actual output of a business and its break-even output

Question 5

what are break-even charts also useful tools for

Answer 5

planning purposes, reading off the profit and loss at any given level of output can help a business plan success or failure

Question 6

what ‘what if’ questions can the break even chart help to answer relating to profit, break-even and margin of safety?

Answer 6

what if…

• selling price is reduced or increased
• variable cost per unit reduces or increases
• fixed costs change

Question 7

limitations to break even analysis

Answer 7

it replies on certain simplifying assumptions which may be false in the real business environment

Question 8

what are the false assumptions which limit break even analysis

Answer 8

• variable costs are assumed to increase constantly
• assumes that the firm sells all its output in the same time period
• based on a firm only selling one type of product at a single price
• break-even analysis is a static model but the business environment can be very dynamic.

Question 9

overhead costs

Answer 9

are those that are incurred by the business as a whole but can be difficult to attribute to a particular section of the business.

Question 10

budgets

Answer 10

is a target for revenue or costs for a future time period

Question 11

what factors of a business is a budget set for

Answer 11

a businesses income and expenditure budgets:

income: sets a target for the value of sales to be achieved
expenditure: this gives budget holders a limit under which they must keep their departments costs

Question 12

if there are budgets for both income and expenditure, what figure can be identified over each budgeted time period

Answer 12

a profit figure

Question 13

the five purposes of budgets:

Answer 13

• they focus expenditure on the companys main objectives for a time period
• expenditure budgets are set to ensure no department/individual spends more than company expects
• performance can be measured
• spending power delegated to local managers who have better understanding of local conditions
• may help motivate staff to try hit budget targets

Question 14

2 types of budgeting:

Answer 14

• historical budgets

- zero-based budgets

Question 15

historical budgets

Answer 15

a budget set using last years budgets as a guide then making adjustments from known changes

Question 16

zero-based budgets

Answer 16

setting each budget to 0 each year and then expects budget-holders to justify a budget figure to work to each year

Question 17

variance analysis

Answer 17

involves looking back to calculate the difference between a budgeted figure and the actual figure that occurred.

Question 18

two ways variance can be

Answer 18

• adverse: the actual figure was worse than the budgeted figure
• favourable: the actual figure was better for the business than budgeted figure

Question 19

why can budget variances occur?

Answer 19

3 underlying reasons:

• the original budget was unrealistic
• the target was not met due to factors beyond budget holders control
• the target was not met due to factors within budget holders control

Question 20

4 difficulties with budgeting

Answer 20

• setting budgets (hard to ensure realistic)
• agreeing or imposing budgets (unmotivates budget-holder)
• failing to understand cause of variance
• cost of the system outweighing the benefits (less of a need of budgets in small companies)