2.2.4 Budgets

Question 1

What are budgets

Answer 1

• Budgets are forecasts or plans for the future finances of a business
• These can be for the business as a whole or set for specific functions e.g. a marketing budget

Question 2

Budgets can be

Answer 2

Income
Expenditure
Profit

Question 3

What is the purpose of setting budgets

Answer 3

• Provides a quantifiable target, that can be communicated to interested parties, against which actual outcomes can be measured
• Helps with planning and forecasting to inform decision making

Motivates budget holders due to increased responsibility

Question 4

Describe income budgets

Answer 4

• a target set for the amount of revenue to be achieved in a set time period
• can be split by products, services or departments
• may be translated into individual sales targets for staff
• informed by market research and sales forecasts
• informs predicted cash inflows in the cash flow forecast

Question 5

Describe expenditure budgets

Answer 5

• a limit placed on the amount to be spent in a given period of time
• can be split by department, function or product
• responsibility can be passed to individual managers
• a separate expenditure budget may be set for running costs and start up costs
• informs predicted cash outflows in cash flow forecast
• allows for monitoring of under spending as well as overspending

Question 6

Describe profit budgets

Answer 6

• a target set for the surplus between income and expenditure in a given period of time
• calculated based upon the income and expenditure budget
• may be set for the business as a whole or for individual departments, products or branches
• will be used to inform decision making on products to include in the businesses portfolio as well as where cuts may need to be made

Question 7

What are the two types of budgets

Answer 7

Historical and zero

Question 8

Describe historical budgets

Answer 8

• Setting budgets based on previous year’s
• Can be adjusted in line with actual outcomes e.g. if a budget was underspent should it be set lower this year?
• Can be linked to the ability to meet objectives
• Can be incremental i.e. last year plus a %

Question 9

Describe zero based budgets

Answer 9

• Setting a budget of zero
• All departments have to justify any requests for expenditure
• Time consuming but flexible and can reduce waste

Question 10

What is variance

Answer 10

The difference between the actual income expenditure profit or income budget compared to the figure that has been budgeted

Question 11

Describe adverse variance

Answer 11

• An adverse variance is one that is bad for the business
• Expenditure higher than budget
• Income lower than budget
• Profit lower than budget

Question 12

Describe favourable variance

Answer 12

• A favourable variance is one that is good for the business
• Expenditure lower than budget
• Income higher than budget
• Profit higher than budget

Question 13

Possible causes of variances

Answer 13

•Action of competitors
Lower prices
Introduce a new product
Close a store
•Action of suppliers
Change prices
Offer a discount
•Changes in the economy
Change in interest rates
Increase to minimum wage
•Internal inefficiency
Poor management of a budget
Demotivated sales team
•Internal decision making
Change suppliers

Question 14

Having identified variances managers now need to decide how to respond by

Answer 14

• Change budgets?
• Staff training?
• Reward staff?
• Change suppliers?
• Reallocate budgets?
• New marketing tactics?
• Review product portfolio?

Question 15

What are the difficulties on budgeting

Answer 15

• Dependent upon predictions and forecasts
• Costs are subject to change
• Actions of competitors are unknown
• Managers may lack experience
• May be subject to bias
• Take time and effort which itself has an associated opportunity cost