Theme 2 Topic 11 - Setting Budgets Flashcards
Define Budget
A financial target a business aims to achieve in the future
What are the three types of budget?
Income budget, Expenditure budget, Profit budget
Define Income Budget
Shows the target income of a business over a period of time (aka revenue or sales budget)
Define Expenditure Budget
Shows the target spending of a business over a period of time (aka cost budget)
Define Profit Budget
Shows the target profit of a business over a period of time
Profit Budget =
Income Budget - Expenditure Budget
What are the two methods of setting a budget?
Historical budgeting, Zero budgeting
Define Historical Budgeting
Involves using the previous years budget and updating it with minor adjustments for inflation and other forecastable changes
What is an advantage of historical budgeting?
Quick and simple to do
What are two disadvantages of historical budgeting?
Assumes business conditions remain unchanged each year, Can lead to wastage if departments are given the same budget each year
Define Zero Budgeting
Involves starting from scratch each year when setting a budget
What is an advantage of zero budgeting?
If done properly it is more accurate than historical budgeting
What are two disadvantages of zero budgeting?
Takes longer to complete, Increased demand on staff time is an expensive resource with an opportunity cost
Define Variance Analysis
The process of monitoring budgets and investigating any differences between forecasted and actual figures
When does variance occur?
When an actual figure differs from a budgeted figure
Variance =
Budgeted Figure - Actual Figure
Define Adverse Variance
Where the difference between an actual and budgeted figure will cause profits to be lower (Budgeted is higher than Actual)
What two things can cause adverse variance?
Costs might have been higher than expected, Revenue/profit might have been lower than expected
Define Favourable Variance
Where the difference between an actual and budgeted figure will cause profits to be higher (Actual is higher than Budgeted)
What two things can cause favourable variance?
Costs might have been lower than expected, Revenue/profit might have been higher than expected
What are two advantages of setting budgets?
Help gain financial support when included in the business plan, To measure performance by comparing targets with actual figures
What are two disadvantages of setting budgets?
May be problems gathering information so budgeting may contain guess work, If targets aren’t realistic they may demotivate staff
