budgets knowledge test

Question 1

Budget

Answer 1

a plan of the future income and/or expenditure of a business

Question 2

variance

Answer 2

the difference between a budgeted figure and the actual figure

Question 3

target setting benefit

Answer 3

Target Setting can be used to motivate employees, which should improve business performance

Question 4

improved planning benefit

Answer 4

improved planning helps managers be prepared for future events; e.g. producing the right amount of inventories

Question 5

control benefit

Answer 5

Departments are set limits to expenditure and use of resources. This reduces costs.

Question 6

Monitoring and calculations of variances benefit

Answer 6

All budgets can be used to compare actual figures to planned figures. This allows a business to make changes where necessary.

Question 7

communication benefit

Answer 7

Between departments and between managers and other employees.

Question 8

limitation figure inaccurate

Answer 8

This can lead to poor decisions being made

Question 9

Limitations - budgets can be restrictive

Answer 9

It may be necessary to make more money available for certain costs if unexpected opportunities arise

Question 10

limitation budgets can demotivate staff

Answer 10

If budgets are not achievable and the staff have not been consulted about them

Question 11

limitations budgets can be time consuming to prepare and monitor

Answer 11

This can cause managers to neglect other aspects of the business

Question 12

zero based budgeting

Answer 12

that budgets are set at zero and managers have to justify every item of expenditure

Question 13

advantages of zero based budgeting

Answer 13

It avoids budgets automatically creeping upwards each year, even though extra funds may not actually be needed.
• It provides flexibility to make funds available

Question 14

drawback of zero based budgeting

Answer 14

More time consuming than incremental budgeting

Question 15

incremental budgeting

Answer 15

using a previous period’s budget or actual performance as a basis with incremental amounts added for the new budget period

Question 16

advantage of incremental budgeting

Answer 16

It is simpler and quicker than zero-based budgeting.

Question 17

drawback of incremental budgeting

Answer 17

It does ignore changing circumstances risks encouraging managers to “spend up to the budget” to avoid losing it in the following year.