2.2.4 budgets

Question 1

define budget

Answer 1

an estimate of income or expenditure for a set period of time (usually a year or month of trading)

Question 2

purposes of using budgets (4)

Answer 2

• planning
• forecasting
• communication
• motivation

Question 2

benefits of planning in terms of budgets

Answer 2

• identify when and where they may run into problems

Question 3

benefits of forecasting in terms of budgets

Answer 3

• based of businesses sales history & how effective they expect their future trading to be
• enable business owners to analyse their margins and other key rations e.g. return on investment

Question 4

benefits of communication in terms of budgets

Answer 4

• reporting back on progress to monitor spending & income

Question 5

benefits of motivation in terms of budgets

Answer 5

• staff become more careful with finance
• more cautious when spending company money if involved in budget setting
• if budgets are applied to parks & benefits, employees are much more likely to keep their costs in line with the budgeted amounts

Question 7

define historical budget

Answer 7

created using previous years expenditure as a base on which to build the budget figures for the next year

Question 8

define zero-based budget

Answer 8

using figures based on potential performance with no historical data (‘clean slate’)

Question 9

what is variance analysis

Answer 9

analyse the budget figures against what actually happens - there may be a variance

Question 10

what is an adverse variance

Answer 10

bad, overspent so less profit

Question 11

what is a favourable variance

Answer 11

underspent in department (good)

Question 12

difficulties of budgeting (4)

Answer 12

• often fixed & inflexible which is difficult in a dynamic market
• tendency for managers to spend up to limit
• time consuming to prepare, monitor & control
• unrealistic budgets can be demoting

Question 13

limitations of budgeting (3)

Answer 13

• could cause inter-department rivalry if some get more money than others
• managers may become budget driven rather than customer driven
• in some industries it is difficult to plan ahead because of large unplanned changes