BUDGETS

Question 1

what is a budget?

Answer 1

a budget is a future financial plan concerning the revenues and costs of a business

Question 2

purpose of a budget

Answer 2

• planning
• forecasting outcomes
• communication
• motivating empoyees = meet budgets
• allocating resources/responsibiities

Question 3

what is historical budgeting?

Answer 3

• last years figures
• considers future actions/circumstances such as an increase in production

Question 4

what is zero based budgeting? and drawbacks?

Answer 4

• Sets each department budgets at zero and demands that budget holders justify every pound they ask for
• helps avoid budgets increasing every year

drawbacks
- long time to provide justification
- time consuming for managers sensible to use every few years

Question 5

what is favourable and adverse variance?

Answer 5

1. favourable = better than expected, costs lower, profits higher
2. adverse = worse than expected, costs were higher, profits lower

Question 6

difficulties of budgeting

Answer 6

• de-motivating employees = unrealistic targets
• department rivalry = compete for budget
• can result in short term decisions to keep targets and forget long term
• only as good as the data being used
• inflexibility in decision making