Budgets

• what is a budget?


  a target amount of money set by a business in a specific period of time
• what can a budget be?

  • expenditure
  • income
  • profit
• what is an expenditure budget?


  the amount to be spent
• what is an income budget?


  the amount to be recieved
• what is a profit budget?


  amount of surplus required from sales revenue after all expenses have been paid.
• what is a historical budget?


  past data can be used as a basis for setting future budgets
• what is a zero based budget?


  each department gets a budgets of nothing and then must justify any requests for spending
• what is an adverse variance?


  the difference between the budgeted amount and the actual amount is bad for the business.
• what is a favourable variance?


  the difference between the budgeted amount and the actual amount is good for the business.
• advantages of budgets?

  • manage money effectively
  • allocate appropriate resources to projects
  • monitor performance
  • meet objectives
  • improve decision making
  • identify problems before they occur
  • plan for future
  • increase staff motivation
• disadvantages of budgets?

  • can be inflexible
  • doesn’t account for unexpected circumstances
  • time consuming
  • create conflict between departments
  • unrealistic targets can be stressful
• advantages of historical budgeting?

  • stable
  • realistic
  • relatively simple and easy to understand
  • impact of change can be seen quickly
• disadvantages of historical budgeting?

  • assumes activities will continue in the same way
  • encourages spending all the budget so it remains the same
  • no incentives to develop new ideas or reduce costs
  • budget may become out of date
• advantages of zero based budgeting?

  • assess wether each department is funded properly
  • focuses on current numbers
  • no overspending
  • better communication
  • involves employees in decision making
• disadvantages of zero based budgeting?

  • doesn’t guarantee savings
  • complex process
  • some managers do not want to justify spending
  • demotivating