Theme 2 Topic 11 - Setting Budgets

Question 1

Define Budget

Answer 1

A financial target a business aims to achieve in the future

Question 2

What are the three types of budget?

Answer 2

Income budget, Expenditure budget, Profit budget

Question 3

Define Income Budget

Answer 3

Shows the target income of a business over a period of time (aka revenue or sales budget)

Question 4

Define Expenditure Budget

Answer 4

Shows the target spending of a business over a period of time (aka cost budget)

Question 5

Define Profit Budget

Answer 5

Shows the target profit of a business over a period of time

Question 6

Profit Budget =

Answer 6

Income Budget - Expenditure Budget

Question 7

What are the two methods of setting a budget?

Answer 7

Historical budgeting, Zero budgeting

Question 8

Define Historical Budgeting

Answer 8

Involves using the previous years budget and updating it with minor adjustments for inflation and other forecastable changes

Question 9

What is an advantage of historical budgeting?

Answer 9

Quick and simple to do

Question 10

What are two disadvantages of historical budgeting?

Answer 10

Assumes business conditions remain unchanged each year, Can lead to wastage if departments are given the same budget each year

Question 11

Define Zero Budgeting

Answer 11

Involves starting from scratch each year when setting a budget

Question 12

What is an advantage of zero budgeting?

Answer 12

If done properly it is more accurate than historical budgeting

Question 13

What are two disadvantages of zero budgeting?

Answer 13

Takes longer to complete, Increased demand on staff time is an expensive resource with an opportunity cost

Question 14

Define Variance Analysis

Answer 14

The process of monitoring budgets and investigating any differences between forecasted and actual figures

Question 15

When does variance occur?

Answer 15

When an actual figure differs from a budgeted figure

Question 16

Variance =

Answer 16

Budgeted Figure - Actual Figure

Question 17

Define Adverse Variance

Answer 17

Where the difference between an actual and budgeted figure will cause profits to be lower (Budgeted is higher than Actual)

Question 18

What two things can cause adverse variance?

Answer 18

Costs might have been higher than expected, Revenue/profit might have been lower than expected

Question 19

Define Favourable Variance

Answer 19

Where the difference between an actual and budgeted figure will cause profits to be higher (Actual is higher than Budgeted)

Question 20

What two things can cause favourable variance?

Answer 20

Costs might have been lower than expected, Revenue/profit might have been higher than expected

Question 21

What are two advantages of setting budgets?

Answer 21

Help gain financial support when included in the business plan, To measure performance by comparing targets with actual figures

Question 22

What are two disadvantages of setting budgets?

Answer 22

May be problems gathering information so budgeting may contain guess work, If targets aren’t realistic they may demotivate staff