5.2f Setting Budgets

Question 1

Why do businesses use budgets?

Answer 1

• To measure whether key objectives and targets are being achieved
• To control expenditure
• Provide sense of direction

Question 2

Three types of budget

Answer 2

1. Income budget
2. Expenditure budget
3. Profit budget

Question 3

Key start-up costs

Answer 3

• Cost of premises
• Staff costs
• Marketing

Question 4

Advantages of setting budgets

Answer 4

• Ensures business does not overspend
• Gains financial support
• Establish priorities

Question 5

Disadvantages of setting budgets

Answer 5

• Lack of experience
• Lack of information
• Unexpected costs

Question 6

How to set a budget

Answer 6

1. Set clear objectives for coming year
2. Gather information to base budget on
3. Construct income budget
4. Construct expenditure budget
5. Set profit target based on income and expenditure budgets
6. Summarise detailed budgets in master budget

Question 7

What is a budget holder?

Answer 7

Someone responsible for spending or generating money for each budget

Question 8

What are historical budgets?

Answer 8

Ones updated each year that assumes business conditions stay unchanged

Question 9

What are zero-based budgets?

Answer 9

Ones that start with a budget of £0 each year - departments need to get approval to spend money

Question 10

What are fixed budgets?

Answer 10

Ones in which budget holders have to stick to budget plans throughout the year, even if market conditions change