3.4 Budgets

Question 1

Budget

Answer 1

Budget is a detailed financial plan for a specific period

Question 2

Purpose of budget

Answer 2

• planning
• control
• motivation (work towards goal)
• coordination
• communication

Question 3

Budget types

Answer 3

• Sales budget (forecast of expected sales revenue)
• expenditure budget
• cash budget

Question 4

Budget holder

Answer 4

An individual or department responsible for managing and controlling a specific budget

Question 5

Cost centre defention and purpose

Answer 5

Section of a business where costs are incurred and recorded e.g. accounting department

• track and control costs within specific area of business. Manage expenses effectively

Question 6

Advantages and disadvantages of cost and profit centres

Answer 6

Advantages:
- Improved cost control
- easier to identify areas of excessive spending, clearly assigned responsibility

Disadvantages:
- managers may focus on only minimising costs, maybe at expense of quality or long term benefits
- external factors
- indirect costs allocation (assigning overhead costs to departments to see true cost or profit

Question 7

Profit centres defention and purpose

Answer 7

Section of a business that generates profit, where costs and revenue can be identified and quantified

Question 8

Roles of costs and profit centres

Answer 8

• aiding decision making - allow informed decisions
• better accountability - see which departments are accountable for performance
• identifying issues - e.g. overspending
• increasing motivation

Question 9

Variance analysis - defention and formula

Answer 9

Process of identifying and analysing the differences between budgeted and actually figures

Variance = Actual outcome - budgeted outcome

Question 10

Favourable variance

Answer 10

Actual profit is higher than budgeted, or actual costs is lower than budgeted

Question 11

Adverse variance

Answer 11

Actual profit is lower than budgeted, or actual costs is higher than budgeted

Question 12

Variance analysis purpose

Answer 12

• determine if firm if meeting financial goals
• understand where things are going wrong
• make better future decisions

Question 13

Disadvantages of budgets

Answer 13

• don’t predict unforseen changes
• budget holders often overestimate which loooses its importance
• time consuming
• competition between departments for available finance