Budgeting:

Question 1

What is a budget?

Answer 1

• A budget is a financial plan that a business (or department in the business) sets regarding costs and revenue
• The budget is usually closely aligned with the business objectives
• Budgets can be used to guide decisions

Question 2

How can budgets be used when deciding on planning and resource allocation?

Answer 2

Decide how much each department can spend and which projects get funded.

Question 3

How can budgets be used when deciding on performance control during the year?

Answer 3

• Compare actual figures with the budget
• Overspending or shortfalls trigger action

Question 4

What are the three key aspects budgets are usually set to monitor the financial performance of?

Answer 4

• Revenue: how much money a business expects to bring in from sales of goods or services in a specific period
• Expenditure: how much a business is allowed to spend in a specific period
• Profit: the expected profit a business expects to earn in a specific period

Question 5

What would a revenue budget be?

Answer 5

• A plan for how much money a business expects to bring in from its normal activities (mainly sales of goods or services) over a set period of time
• It sets management targets for sales volume, selling price and any other income streams (e.g. service fees or subscriptions)

Question 6

What would an expenditure budget be?

Answer 6

• A plan for how much the business is allowed to spend in a set period of time
• It covers direct costs, such as raw materials, components and wages, as well as indirect costs, such as rent, marketing and utilities
• It may be split by department or project, keeping spending under control

Question 7

What would a profit budget be?

Answer 7

• A financial plan that combines revenue and expenditure budgets
• It forecasts the expected profit by subtracting planned expenditure from planned revenue for the period
• It gives managers a clear profit targets and a basis for judging overall financial performance

Question 8

What are the advantages of budgeting?

Answer 8

• A budget shows every department how much they can spend and what sales targets to hit, so activities line up with overall business objectives
• Preset spending limits highlight overspending quickly and encourage managers to look for savings
• Comparing actual results with budgeted figures pinpoints good and poor performance and can provide evidence for bonuses, promotions or identifying training needs

Question 9

What are the disadvantages of budgeting?

Answer 9

• Gathering data, negotiating figures and revising budgets can take up management time, especially for smaller firms
• Gathering data, negotiating figures and revising budgets can take up management time, especially for smaller firms
• Managers may overestimate cost forecasts or understate sales to make targets easier to beat, reducing the budget’s accuracy

Question 10

How do businesses analyse budgets?

Answer 10

• Once budgets have been set, managers carry out variance analysis to compare actual performance to the targets set in the budget
• A budget variance is a difference between the figure budgeted and the actual figure achieved by the end of the budgetary period
• Variance analysis seeks to determine the reasons for the differences between the actual figures and the budgeted figures

Question 11

How do you calculate revenue variance?

Answer 11

Revenue variance = actual revenue - budgeted revenue

Question 12

How do you calculate cost variance?

Answer 12

Cost variance = actual cost - budgeted cost

Question 13

How do you calculate profit variance?

Answer 13

Profit variance = actual profit - budgeted profit

Question 14

What is favourable variance?

Answer 14

• This is where the actual figure achieved is better than the budgeted figure

Question 15

What is an adverse variance?

Answer 15

• This is where the actual figure achieved is worse than the budgeted figure