Budgets

Question 1

Define a BUDGET

Answer 1

A budget is made up of forecasts or plans for the future financial activities of a business. It is usually expressed in monetry terms but can also be done through sales volume, output or other non-financial terms.

Question 2

What are the three types of budget?

Answer 2

Income, profit, expenditure

Question 3

What are the main approaches to budgeting?

Answer 3

0 based budgeting - budgeting based on new predictions and data.
Historical budgeting - budgeting based off of existing data or last years figures.

Question 4

What are the advantages to budgeting?

Answer 4

• Establishes priorities and sets targets
• Turns objectives into practical reality
• Provides direction and co-ordination
• Assigns responsibilities
• Allocates resources

Question 5

What are the problems faced when budgeting?

Answer 5

• Dependent on forecasts and predictions
• Costs are subject to change
• Actions of competitors are unknown
• Managers may lack experience
• Takes time and effort which is an opportunity cost

Question 6

Define VARIANCE

Answer 6

Variance is the difference between the budgeted amount and the actual amount.

Question 7

Define VARIANCE ANALYSIS

Answer 7

Variance analysis is the process of calculating and interpreting these variances.

Question 8

What are the different types of variance?

Answer 8

Favourable (good for the business) and adverse (bad for the business)

Question 9

What are possible causes of variance?

Answer 9

• Actions of competitors
• Actions of suppliers
• Changes in the economy
• Internal ineffiency
• Internal decision making