budgeting

• What is a budget?

  A budget is a financial plan of action covering a specific time period.
• What does a budget describe?

  A budget describes expected levels of expenditure and revenues of a business.
• How do large businesses prepare budgets?

  Large businesses prepare budgets on a departmental basis or in relation to business functions.
• If a business aims to increase sales by 20%, how should its budgets reflect this objective?

  The overall budget and departmental budgets should reflect the objective of increasing sales by 20%.
• What is the nature of the budgeting process in large businesses?

  • Budgeting and monitoring are ongoing procedures.
  • Budgets should continually evolve to adapt to changes.
• What are the main steps involved in the budgeting process?

  The budgeting process typically involves establishing aims and objectives, setting functional budgets, breaking down budgets, monitoring budgets, and examining variances.
• What should be established first in the budgeting process?

  The aims and objectives of the business should be established first.
• What are the three main functional budgets?

  The three main functional budgets are production, marketing, and financial budgets.
• What is the purpose of the production budget?

  • Establishes output levels based on business objectives.
  • Involves costs of purchasing raw materials, direct labor, and other production costs.
  • It is an expenditure-only budget.
• What does the marketing budget combine?

  • Combines revenues from predicted sales.
  • Combines costs from operating the marketing strategy.
• What is the basis of the financial budget?

  • Based on the business's cash flow forecast.
  • Determines if income can cover expenditure.
  • Examines methods for raising funds if necessary.
• How can budgets be further broken down?

  Budgets can be broken down into sub-budgets like training, health and safety, and direct selling budgets.
• What procedures should be established for monitoring budgets?

  • Collecting feedback.
  • Checking targets.
  • Communicating regularly with budget holders.
• What should be done with any variance from predicted budgets?

  Any variance from predicted budgets should be examined and reacted to.
• What should be done with the experience gained from setting one period's budgets?

  The experience gained should be applied to the setting of the following period's budgets.
• What are the benefits of budgeting for a business?

  • Improved management control.
  • Improved financial control.
  • Awareness of managerial responsibilities.
  • Effective use of limited resources.
  • Motivation for managers.
  • Improved communication systems.
• What problem may arise from excluding individuals from the budgeting process?

  Those excluded may not be committed to the budgets and may feel demotivated.
• What issue can arise from inflexible budgets?

  If budgets are inflexible, they may not adapt to changes in the market or other conditions.
• What is necessary for an effective budget?

  An effective budget must be based on good quality information.
• What is zero budgeting?

  • Involves starting with a clean sheet.
  • Requires justification for all expenditures.
  • Improves control and resource allocation.
  • Limits unjustified annual budget increases.
  • Reduces unnecessary costs.
  • Motivates managers to explore alternatives.
• What is the basis of budgetary control?

  • The basis of budgetary control is variance analysis.
  • A variance is any unplanned change from the budgeted figure.
• What are the two types of variances?

  Variances can be favourable (F) or adverse (A).
• When does a favourable variance occur?

  A favourable variance occurs when expenditure is less than expected or revenues are higher than expected.
• When does an adverse variance occur?

  An adverse variance occurs when expenditure is higher than expected or revenues are lower than expected.
• Why must budgets be monitored for variances?

  Budgets must be monitored for variances so that appropriate action can be taken.
• Who is responsible for taking action on budget variances?

  The budget holder is responsible for taking appropriate action on budget variances.
• How is the calculation of variances performed?

  Variances are calculated by comparing the actual figure with the budgeted figure and showing the difference as either favourable (F) or adverse (A).
• What is the total variance in the provided budget example?

  • Total variance is £6,000 (F).
  • This indicates that overall revenues exceeded expenditures.
• What is the importance of a well-prepared budget?

  A well-prepared budget is important as it helps with financial control and coordinating business activity.
• What can happen if a budget is poorly prepared?

  A poorly prepared budget can waste time, demotivate staff, and restrict business activities.
• What is zero budgeting and why is it beneficial for some areas of business?

  • Zero budgeting requires justification for all expenditures.
  • It is beneficial as it improves control, resource allocation, and reduces unnecessary costs.
• What do adverse and favourable variances mean?

  Adverse variances indicate higher expenditures or lower revenues than expected, while favourable variances indicate lower expenditures or higher revenues than expected.