Budgeting

Question 1

Budget definition

Answer 1

A budget is an estimate of income or expenditure for a set period of time. This is a financial blue that calculates cost and revenues (income and expenditure) and this allows for comparison with actual data later on.

Question 2

Revenue budget

Answer 2

These set out the business’ s expected revenue from selling it’s products. Important information here includes the expected level of sales and likely selling price of the product.

Question 3

Expenditure budget

Answer 3

These are also called cost or production budgets. businesses need to plan their expenditure on labour, raw materials, fuel and other items that are essential for the process of production- these set out the expenditure on a monthly basis for these items.

Question 4

Profit budget

Answer 4

By combining sales revenue and expenditure budgets it is possible to calculate expected profits. The profits budget is animportant piece of information for managers and would be of interest to many of the business’s stakeholders.

Question 5

Variance analysis

Answer 5

Variance analysis is the process a business undergoes to check the actual. Revenues and expenditure against the budgeted (forecasted) costs and revenues.

Question 6

Variance definition

Answer 6

A variance is the difference between the actual figure and the budgeted figure for revenue or expenditure.

Question 7

Favourable variance

Answer 7

A favourable variance occurs when expenditure is less than expected or revenues are lower than expected e.g. An favourable occurrence which would result in more profit.

Question 8

Adverse variance

Answer 8

An adverse variance occurs when expenditure is higher than expected or revenues are lower than expected. E.g. Adverse occurrence that would lead to lower profit.
Once variance has been calculated action may need to be taken to solve/ reduce the problem.

Question 9

Why should businesses set budgets

Answer 9

• To limit overspending
• maximise profit
• ensure sufficient cash flow/working capital

Question 10

Difficulty setting budgets

Answer 10

Difficult to forecast sales accurately
Unexpected change
Decisions by government and other public bodies.

Question 11

Benefits of budgeting

Answer 11

• Improved management control
• improved financial control
• budgeting allows management to be aware of their responsibilities
• budgeting ensures, or should ensure, that limited resources are used effectively
• budgeting can motivate managers
• budgeting can improve communication systems within the organisation

Question 12

Drawbacks

Answer 12

• Those excluded from the budgeting process may not be committed to the budgets and may feel demotivated.
• if budgets are inflexible, then changes in the market or other condition may not be met by appropriate changes in the budget. For example, if a competitor starts a major new advertising campaign, and the marketing budget does not allow for a response to this, sales are likely to be lost.
• also an effective budget can only be based on good quality information many managers overstate their budgetary needs to protect their departments - this can lead to lack of control and poor allocation of resources.