What is a budget?
A plan for the future that an organisation aims to achieve
It differs from a forecast, which is based on assumptions.
Who is a budget holder?
An individual responsible for the initial setting and achievement of a budget
Budget holders play a key role in managing financial resources.
List the purposes of budgets.
- Plan and improve upon plans
- Allocate and organise resources
- Set realistic targets
- Coordinate departments
- Monitor and control progress
- Measure and assess performance
Budgets are essential for effective financial management.
What is a potential limitation of budgets regarding flexibility?
May lack flexibility, making them unrealistic with unexpected changes
This can hinder an organisation’s ability to adapt to new circumstances.
True or false: Budgets are primarily focused on the long term.
FALSE
Budgets often focus on short-term decisions that may not be beneficial in the long run.
What is incremental budgeting?
A traditional budgeting method using last year’s budget as a basis for the next year
Adjustments can be made based on previous performance.
What is zero budgeting?
All budgets are set to zero initially, requiring budget holders to justify their funding
This method can be time-consuming and may misallocate funds.
What is flexible budgeting?
A budgeting method that allows changes if estimated sales and production vary
This approach is beneficial in a dynamic business environment.
Define variance analysis.
Calculating differences between budgets and actual performance, and analyzing reasons for differences
It helps assess manager performance and set future budgets.
What does adverse variance indicate?
A lower-than-expected profit due to differences between budgeted and actual figures
Causes may include low sales or poor budgeting.
What does favourable variance indicate?
A higher-than-expected profit due to differences between budgeted and actual figures
This is usually a result of high sales or lowered costs.
