2.2.4 budgets

Question 1

budget

Answer 1

a financial plan for the future concerning the revenues and costs of a business

Question 2

process of budgets

Answer 2

revenue and costs budgets are prepared in advance then compared with actual performance

Question 3

uses of budgets

Answer 3

motivate staff
improve efficiency
allocate resources
communicate targets

Question 4

purpose of budgets

Answer 4

managers must think ahead
prevents spending an unlimited amount of money

Question 5

why would a business set a budget

Answer 5

planning
motivation
decisions
control

Question 6

effective budgeting

Answer 6

managerial responsibilities are clearly defined
managers have responsibility
performance is monitored

Question 7

two main approaches to budgeting

Answer 7

historical
zero-based

Question 8

historical budgets

Answer 8

uses last years figures as the basis for the budget.
based on actual results.

Question 9

disadvantages of historical budgets

Answer 9

dynamic business environment - circumstances change
does not encourage efficiency

Question 10

zero-based budgets

Answer 10

budgeted costs and revenues are set to zero.
budget is based on new proposals for sales and costs.

Question 11

disadvantages of zero-based budgets

Answer 11

makes budgeting more complicated and time-consuming
may be used in a start-up with no historical data

Question 12

three main budgets

Answer 12

revenue budget
cost budget
profit budget

Question 13

cost budget

Answer 13

expected cots based on sales budget
overheads and other fixed costs

Question 13

revenue budget

Answer 13

expected revenues and sales
broken down into more detail

Question 14

profit budget

Answer 14

based on the combined sales and cost budgets
may form basis for performance bonuses

Question 15

variance analysis

Answer 15

calculating and investigating the differences between actual results and the budget

Question 16

two types of variance

Answer 16

favourable variance
adverse variance

Question 17

favourable variance

Answer 17

actual figures are better than budgeted figure
e.g. lower costs, higher revenue/profits

Question 18

adverse variance

Answer 18

actual figure worse than budgeted figure
e.g. higher costs, lower revenue/profits

Question 18

causes of favourable variances

Answer 18

stronger market demand than expected = higher actual revenue.
selling prices increased higher than budget.
competitor weakness = higher sales

Question 19

causes of adverse variances

Answer 19

unexpected costs = unbudgeted costs.
over spends by budget holders.
market conditions = selling prices are lower than budget

Question 20

what do variances depend on

Answer 20

was the variance foreseen?
size e.g. money and percentage terms.
cause.

Question 21

difficulties of budgeting

Answer 21

tendency for managers to spend up to limit.
can cause inter-department rivalry.
difficult to plan ahead in some industries