budgets

Question 1

what is a budget

Answer 1

a financial plan that is prepared and agreed in advance. It is related to a defined period of time

Question 2

what are budgets concerned with

Answer 2

incomes (revenues ) and expenditure (costs) of a business

Question 3

income budget

Answer 3

the agreed, planned income for a business over a period of time

Question 4

expenditure budget

Answer 4

the agreed, planned expenses for a business over a period of time

Question 5

profit budget

Answer 5

the agreed, planned profit for a business over a period of time

Question 6

equation of the profit budget

Answer 6

income - expenditure (costs)

Question 7

what are the 4 things budgets are set according to and what does each mean

Answer 7

company objectives (what are your spending priorities for the coming year)

competitor spending ( attempting to match budgets to those of your competitors)

last years allocation (looking at what was allocated last year and simply add a % to account for inflation)

as a % of sales revenue ( deciding on how much money to allocate depending on the value of previous sales)

Question 8

what is the budget setting cycle (it loops and has 7 elements)

Answer 8

set objectives

market research

set income budget

set expenditure budget

set profit budget

set functional budgets

control and review

Question 9

what are 4 reasons for setting budgets and meaning

Answer 9

establish priorities (what areas of business do yu spend most money on)

to gain financial support (potential investors wanna see your budgets)

to avoid overspending ( particularly important in early stages)

to motivate staff ( budget holders may be motivated by extra responsibilities. meeting budgets may motivate teams)

Question 10

what are 3 problems with setting budgets and explain

Answer 10

inexperience ( new owners may lack experience of market and cost /rev involved)

poor research ( yu may have o base some budgets on ‘guesstimates’)

unforeseen changes ( business is an ever changing world. internal and external factors can change )

Question 11

budget variance equation

Answer 11

variance = actual level - planned level

Question 12

what is it called when a business’s variance is good and how do we show this

Answer 12

it is a favourable variance

we show by adding an ‘F’ after calculated figure
(eg £1000F)

Question 13

what is it called when a business’s variance is bad and how do we show this

Answer 13

it is an adverse variance

we show by adding an ‘A’ after calculated figure
(eg £1000A)