Budgets & variance

Question 1

Budgets

Answer 1

A financial plan for the future concerning the revenues & costs of a business

Question 2

Historical budgeting

Answer 2

-Uses last year’s figures as the basis for the budget
-Realistic as it is based on actual results
-However, circumstances may have changed, e.g. new competitors

Question 3

Zero-based budgeting

Answer 3

-Budgeted costs and revenues are set to zero
-All expenses must be justified from scratch for each new period
-Managers must think about how every dollar is spent
-More time coinsuming & complicated

Question 4

The 3 types of budgets

Answer 4

1. Revenue budget- expected rev & sales
2. Cost budget
3. Profit budget- combined sales & cost budgets

Question 5

Key info for a budget

Answer 5

-Financial performance in previous years
-Market research

Question 6

Difficulties in budgeting accurately

Answer 6

Sales forecasts
-Markets change rapidly
-Hard for start-ups
Costs
-Likely to be unexpected costs
-Influenced by external factors, e.g. tax

Question 7

Variance analysis

Answer 7

Calculating and investigating the differences between actual results and the budget

Question 8

Variance

Answer 8

difference between actual & budget figures
-Can be positive, better than expected
-Adverse, worse than expected

Question 9

Causes of positive variance

Answer 9

-Stronger demand = higher rev
-Increased sales more than the budget
-Competitors’ weakness = higher sales
-Better productivity then expected

Question 10

Causes of adverse variance

Answer 10

-Unexpected events- unbudgeted costs
-Market conditions cause selling price to decrease
-Sales forecast was over optimistic

Question 11

Limitations of budgeting

Answer 11

-Only as good as the data used
-Inflexibility in decision-making to keep in budget
-Needs to be changed as circumstances change
-Take time to do