BUDGETING

Question 1

Definition of budgeting

Answer 1

A target for costs or revenue that a firm or department must aim to reach over a given time

Question 2

Definition of income budgeting

Answer 2

Sets a floor i.e. minimum target for income and ensures that the firm makes a certain amount from sales revenue

Question 3

Definition of expenditure budgeting

Answer 3

Sets a maximum target for costs

Question 4

Why is budgeting used

Answer 4

• ensures that no department spends more than the company expects
• provide a measure to compare with success of an employee
• enable spending power is delegated to local authority who better know how to use it
• to motivate staff in a department -> gives figures to aim for

Question 5

How to construct a budget

Answer 5

1. make a judgement of likely sales revenue
2. set a cost ceiling that allows for acceptable profit
3. total costs for the firm is broken down into departments

Question 6

What is historical budgeting

Answer 6

setting budgets based off of sales revenue and costs in past years. Usually add a percentage to the budgets every year

Question 7

Advantages of historical budgeting

Answer 7

• usually accurate for established firms

- quick and easy

Question 8

Disadvantages of historical budgeting

Answer 8

• doesn’t account for any external shocks

- budget creep occurs therefore doesn’t promote efficiency

Question 9

What is zero-based budgeting

Answer 9

budgets are set to 0 each year and the budget holders are asked to justify every pound they ask for

Question 10

Advantages of zero-based budgeting

Answer 10

• accurate
• minimises unnecessary costs
• prevents budget creep

Question 11

Disadvantages of zero-based budgeting

Answer 11

• time consuming
• hard to justify the need for and extra £1,000 therefore can be wasteful of time
• best to do this once every few years

Question 12

What is a simple budget statement

Answer 12

An estimate for the revenues and expenses for a specific period

Question 13

What variance analysis

Answer 13

It is the analysis of the accuracy of a budget, can be favourable or adverse

Question 14

What is a favourable variance

Answer 14

Where the variance between the actual and budgeted sums is positive for the business i.e. a lower expenditure budget or a higher income budget

Question 15

What is an adverse variance

Answer 15

Where the variance between the actual and budgeted sums is negative for the business i.e. a higher expenditure budget or a lower income budget

Question 16

What is done when variance is too high

Answer 16

management needs to consider whether the fault occurred in the budget or in the achievement

Question 17

Negatives of budgeting

Answer 17

• can’t be used when the main factor affecting sales is external e.g. weather
• businesses need to decide whether the budget will cost more in terms of time to the business than it could save

Question 18

What is an income budget

Answer 18

setting a minimum figure for the revenue to be generated by a product/manager/department