5.2f - Setting Budgets

Question 1

Advantages of budgets:

Answer 1

• Measure whether objectives are being achieved
• Control expenditure
• Provide sense of direction
• Monitor actual results against budget
• Gain financial support

Question 2

Budget holder definition

Answer 2

Someone responsible for spending or generating the money for each budget

Question 3

Zero-based budgeting definition

Answer 3

A budgeting method involved starting with a budget of £0 and having to get approval to spend money

Question 4

Historical budget definition

Answer 4

A budgeting method which is updated each year

Question 5

Advantages of historical budgets:

Answer 5

• Quick

- Simple

Question 6

Disadvantages of historical budgets:

Answer 6

Assumes business conditions stay unchanged

Question 7

Advantages of zero-based budgeting:

Answer 7

• Accurate

- Flexible

Question 8

Disadvantages of zero-based budgeting:

Answer 8

Takes longer

Question 9

Fixed budgeting definition

Answer 9

A budgeting method involving budget holders having to stick to budget plans throughout the year, even if market conditions change

Question 10

Flexible budgeting definition

Answer 10

A budgeting method involving budgets being altered in response to significant change

Question 11

What are the three types of budget?

Answer 11

• Income
• Expenditure
• Profit

Question 12

What are the key start-up costs?

Answer 12

• Cost of premises
• Staff costs
• Marketing

Question 13

Disadvantages of budgets:

Answer 13

• Lack of experience
• Lack of information
• Unexpected costs
• Hard to predict

Question 14

What are the steps to set a budget?

Answer 14

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