Booklet 10: Budgeting

Question 1

What is the role of Budgeting? (4)

Answer 1

A budget is a projected financial plan that lays out specific targets for income, expenditure costs and expected profits for a given period of time.

Question 2

2 advantages and 2 disadvantages of the usefulness of budgeting. (18)

Answer 2

Advantages
1.Allows an organisation to control both their income and their expenditure and can highlight areas where the organisation is not performing as well.
2.Clarifies the roles and responsibilities of management within an organisation

Disadvantages
1.Dependant upon the quality of the information provided. Poor quality information results in budgets that are meaningless.
2.Can be affected by government decisions making it obsolete.

Question 3

What is a fixed budget? (4)

Answer 3

A fixed budget is rigid and remains the same whatever the level of output of the business.

Question 4

3 problems of setting budgets (4)

Answer 4

1.Lack of agreement
2.Lack of participation by individual managers
3.Refusal of individual managers to accept changes

Question 5

2 advantages and 2 disadvantages of a fixed budget. (18)

Answer 5

Advantages
1.Based on historical data and the current financial state
2.Helps the business to keep costs down

Disadvantages
1.Not amended at any time during that year, even if there are changes in the level of business activity. E.G. Storms
2.Stressful for managers to keep a tight control of costs