Budgets

Question 1

What is a budget?

Answer 1

This is an financial plan and an agreed spending limit within a business

Question 2

Why would a business set one?

Answer 2

• Motivation
• Planning
• Decisions
• Control

Question 3

Historical figures budget

Answer 3

• This is a budget set for the business using current financial figures
• Realistic in that it is based on last years sales

Question 4

Zero based budgeting

Answer 4

This is a budget set for a business by using figures based on the potential performance of the business
- Takes away all historical data and starts with a clean slate

Question 5

Variance analysis

Answer 5

• Analyse the budget figures against what actually happens – there might be a variance

Question 6

Adverse variance

Answer 6

When the manager has overspent past the allocated budget depends on reasons for example not enough staff

Question 7

Favourable variance

Answer 7

Manager has underspent in his department and would be regarded as a success as any costs will have an impact on profit.

Question 8

Difficulties of budgeting

Answer 8

• Tendency to spend to limit
• Budgets often fixed to the year and therefore inflexible making it difficult especially if the business is dynamic
• Unrealistic budgets can be unmotivating.