Finance Budgeting

Question 1

Budgeting

Answer 1

Financial plans for the future over a given period of time that describes the expected levels of expenditures and revenues

Question 2

Sales revenue budgets

Answer 2

Set out a business’ planned revenue from selling its products - important info includes expected level of sales and the likely selling price

Question 3

Expenditure budgets

Answer 3

Sets out a business’ planned expenditure on labour, raw materials, fuel and other items essential for production

Question 4

Advantages of budgeting

Answer 4

•controlling income and expenditure
•regulate the spending of money and highlight losses, waste, inefficiency
•act as a review and allow time for corrective action
•allow delegation without loss of control- subordinates set their own targets
•help in co-ordination of a business and improve communication
•budgets provide clear targets to be met and help employees focus on costs
•act as a motivator for staff if budget is met

Question 5

Disadvantages of budgeting

Answer 5

•can be time consuming for managers in small businesses
•poor motivation if missed targets or staff resent have no part in establishing budgets
•actual figures can be different from budgeted ones- could lose its significance
•budget must not be too inflexible as business opportunities might be missed
•poorly constructed budgets= can lead to poor decision making

Question 6

Zero budgets

Answer 6

Involves managers starting with a clean sheet- they have to justify all expenditure made

Question 7

Results of zero budgets

Answer 7

•improves control
•helps with allocation of resources
•limits the tendency for budgets to increase annually with no real justification for the increase
•reduces unnecessary costs
•motivates managers to look at alternative options

Question 8

Budgetary control: Variances

Answer 8

A variance is any unplanned change from the budgeting figure- they occur when an actual figure for sales or expenditure differs from the budgeted figure; they can be favourable (F) or adverse (A)

Question 9

Favourable adverse

Answer 9

Exists when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget

Question 10

Adverse variance

Answer 10

Occurs when the difference between the figures in the budget and the actual figures will less to the businesses’ profits being lower than planned

Question 11

Reasons for changes in variances

Answer 11

•economy is in a recession so people are spending less
•a competitor brought out a new product
•raw materials costs may have fallen
•cheaper suppliers
•employees may have been better trained/motivated
•fewer employees may have been employed to produce the same output