118 budgeting

Question 1

what isn’t a budget

Answer 1

a budget is a financial plan of action normally covering a specific time period eg.6 months or 1 year

Question 2

what is the purpose of a budget

Answer 2

-to gain financial support eg. a bank will need to see budgets
-ensure they don’t overspend
-assign responsibilities to budget holders (managers) and allocate resources (mainly money)
-create a list of objectives and numerical goals for the business, which will help to motivate workers and managers

Question 3

what are the 3 types of budgets

Answer 3

-income budget-> shows agreed , planned income
-expenditure budget-> shows agreed, planned expenditure
-profit budget -> shows the agreed , planned profit for a buisinesn

Question 4

what is variance analysis

Answer 4

-once a business has conducted its budget it is crucial that a business returns to the budget to see how accurate their predictions were.
-business can use variance analysis as a means of seeing how accurate their budgeting is

Question 5

what is favourable variance

Answer 5

when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget

Question 6

what is adverse variance

Answer 6

when the difference between the budget and actual figures will lead to the business’s profits being lower than planned

Question 7

how to calculate variances

Answer 7

1. actual-budget
   2.will this difference result in a higher or lower profit ?
2. higher profits- favourable, lower profits- adverse

Question 8

evaluate the use of budgeting to managers

Answer 8

(+) budgeting communicates targets directly to all employees, and it can help managers minimise costs and allocate resources more efficiently, improving profits-> a result, managers may be rewarded financially for exceeding the targets (objectives) set
(-) the resources allocated may not be not sufficient for managers to run the business efficiently

Question 9

evaluate the use of budgeting to employees

Answer 9

(+)sales and costs targets can act as motivational tools as there is an outcome for meeting targets.leading to increased job satisfaction- benefiting to the business as the workers are motivated and perform bette
(-) setting unrealistic figures (targets) may have a negative impact on employee motivation. This will lead to underperforming workers,impacting the business’ ability to achieve budgeted figures

Question 10

evaluate the use of budgeting to suppliers

Answer 10

(+) more likely to be paid on time and in full as budgeting helps a business to control its revenue and costs-so the business will be better able manage its working capital (cash flow) and therefore be able to pay expenditure
(-) a budget is only a prediction- data may be inaccurate or external factors may cause adverse variances, so a business won’t be able to pay expenditures- leading to suppliers not receiving payments on time or in full

Question 11

evaluate the use of budgeting to shareholders

Answer 11

(+) having sale targets and keeping costs down will help cash flow as well as maximising profit margins resulting in higher dividends
(-)they may have expected higher profits so receive less than expected dividends

Question 12

what does budgeting depend on (evaluation)

Answer 12

-whether the budget targets are realistic to stakeholders
-whether the future can be predicted eg. fast moving market
-the experience of the finance manager in setting the budget
-whether this business learns from its mistakes to improve future budget predictions