Budget

Question 1

What is a budget?

Answer 1

Forward financial plan over a specified period of time, used to measure expected levels of revenue.

Question 2

What are the types of budget?

Answer 2

• Revenue
• Costs
• Profit
• Zero budget – Manager starts with a clean sheet, where they must justify expenditures

Question 3

What is the purpose of goal setting?

Answer 3

• Provides quantifiable targets against which actual outcomes are measured. – they inform decision making, manager expenditure under control.

Question 4

Advantages of budgeting

Answer 4

• Motivate employees through performance linked pay
• Managers and shareholders would use to monitor performance
• Identify areas with significant variances to reduce costs or boost revenue

Question 5

Disadvantages of budgeting

Answer 5

• Only effective if data is accurate
• System would need to be updated, due to change in circumstances – which is time consuming
• Could potentially demotivated staff if held accountable for a budget variance

Question 6

What is Budgetary control?

Answer 6

• Budget is monitored for any differences in revenue or expenditure compared to budgeted figure
• Any difference is called a variance

Question 7

Calculation for variance

Answer 7

• Variance = Actual figure – budgeted figure

Question 8

What is a favourable variance?

Answer 8

Favourable variance = Higher revenue than expected, lower costs than expenditure than expected.

Question 9

What is an adverse variance?

Answer 9

Adverse = Lower revenue than expected, higher expenditure than expected.

Question 10

What are the potential causes of variances?

Answer 10

Action of suppliers – change of prices, offer discounts
Action of competitors – Lower prices, close a store, introduce a new product
Changes in economy – increase in minimum wage, Changes in interest rates
Internal efficiency – Poor management of budget, demotivated staff
Internal decision making – changes in supplier, special promotions