2.2.4 Budgeting Flashcards
(23 cards)
What is a budget
A forward looking financial plan
What is the purpose of budgets
- Monitor business performance
- Motivate staff
- Improve efficiency
How do budgets help monitor business performance
By comparing budgeted with actual figures
How do budgets help motivate staff
When a budget is achieved
The responsibility for managing a budget
Have an idea of what is happening in the business
Rewards may be linked to budget targets
How do budgets help improve efficiency
Working to a set budget will encourage managers to find more efficient methods
What is the process of preparing a budget
- Determine the budget period and set targets/objectives to e achieved
- Obtain information through market research or historical data
- Prepare budget
- Produce smaller subsidaiary budgets
What is a historical budget
The main focus is last years budget with adjustments made for inflation and other foreseeable changes
What is a zero-based budget
A budgeting system where no money is allocated until m it can be justified by the fund holder
What is the advantage of zero based budget
Avoids budgets creeping up every year
What is the disadvantage of zero based budget
Time consuming to constantly gather detailed information for making spending decisions
How do you set budgets
- Income or sales revenue budget
- Production budget
- Profit budget
What is an income or sales revenue budget
Planned income or sales revenue for a time period
This is achieved by multiplying price by sales, usually for each month
What is a production budget
Once a sales budget has been produces, a production budget can be calculated
This will be based on the expected sales
What is a profit budget
This will show the expected profit over a time period taking into account all of the income and expenditure of the firm
What are 2 pieces of information that companies use to set next years budget
Last years budget, inflation rates
What is a budgeting variances
The amount by which the actual results differs from the budgeted figure.
It it usually measured on either a monthly or yearly basis
What are the 2 types of variance
- Favourable variance
- Adverse variance
What is favourable variance
One which leads to higher than expected profit, caused by wither revenue going up or costs going down
What is adverse variance
One which leads to lower than expected profit due to wither revenue going down or costs rising
What are the difficulties of budgeting
- Setting budgets
- Rigidity
- Short term decisions
How is setting budgets a difficultie of budgeting
Inaccurate sales data, conflict, costs, overambitious objectives
How is rigidity a difficultie of budgeting
Opportunities may be missed if the budget finance is not avaliable
How is short term decisions a difficulty of budgeting
May be taken to stay within the current budget that will harm the firm in the long term
E.g. cheaper raw materials
