3.4 Budgeting

• Budgeting is a detailed plan
• Profit is calculated as the difference between income and expenses.
• Steps in the budgeting process

  1️⃣ Set financial objectives

  2️⃣ Gather data

  3️⃣ Forecast income and expenses

  4️⃣ Allocate resources

  5️⃣ Prepare the budget

  6️⃣ Review and revise
• Budgeting aligns financial resources with strategic objectives
• Match the budget type with its characteristic:

  Zero-Based Budget ↔️ Justifies every expense

  Flexible Budget ↔️ Adapts to sales volume

  Incremental Budget ↔️ Adds a percentage increase

  Rolling Budget ↔️ Updated periodically
• A flexible budget is ideal for businesses with predictable demand.

  False
• A rolling budget is updated periodically
• Steps in the budgeting process

  1️⃣ Set financial objectives

  2️⃣ Gather data

  3️⃣ Forecast income and expenses

  4️⃣ Allocate resources

  5️⃣ Prepare the budget

  6️⃣ Review and revise
• Forecasting income is part of the budgeting process.
• What is the primary purpose of budgeting in an organization?

  Forecast future profit
• Budgeting involves creating a detailed plan that outlines projected income and expenses
• Budgets are essential for effective resource allocation and monitoring performance.
• Steps in the budgeting process

  1️⃣ Align financial resources with strategic objectives

  2️⃣ Distribute funds based on priorities

  3️⃣ Track actual performance against budgeted targets
• How does budgeting improve financial control in a business?

  Manages expenses
• Budgeting provides insights into financial risks and opportunities, enabling better decision-making.
• One type of budget is the zero-based budget, which requires justifying every expense
• Match each budget type with its characteristic:

  Zero-Based Budget ↔️ Starts from scratch

  Flexible Budget ↔️ Adjusts to activity levels

  Incremental Budget ↔️ Adds to previous year’s budget

  Rolling Budget ↔️ Continuously updated
• What is the main characteristic of a flexible budget?

  Adjusts to sales levels
• An incremental budget adds a percentage increase to the previous year’s budget
• A rolling budget is updated continuously to reflect current financial conditions.
• Why is a zero-based budget considered more thorough and challenging?

  Justifies every expense
• What is a Zero-Based Budget?

  Starts from scratch
• A Flexible Budget adjusts to varying levels of activity or sales
• An Incremental Budget adds a percentage increase to the previous year’s budget.
• What is a Rolling Budget?

  Continuous, updated periodically
• Match the budget type with its characteristic:

  Zero-Based Budget ↔️ Thorough, challenging current spending

  Flexible Budget ↔️ Adapts to changes in sales or production

  Incremental Budget ↔️ Simple, quick to prepare

  Rolling Budget ↔️ Extends into the future as each period concludes
• A Flexible Budget adapts to changes in sales or production.
• What is one characteristic of an Incremental Budget?

  Simple, quick to prepare
• A Rolling Budget extends into the future as each period concludes
• Steps in the budgeting process

  1️⃣ Setting Financial Objectives

  2️⃣ Gathering Data

  3️⃣ Forecasting Income and Expenses

  4️⃣ Allocating Resources

  5️⃣ Preparing the Budget

  6️⃣ Reviewing and Revising
• What does budget variance refer to?

  Budgeted vs. actual figures
• A favorable variance occurs when actual results are better than budgeted.
• What is an unfavorable variance?

  Actual results are worse
• What is one limitation of budgeting related to rigidity?

  Limits unplanned spending
• Inaccurate forecasts in budgeting may lead to variances between planned and actual figures
• Creating and maintaining budgets is a time-consuming process.
• How can overemphasis on meeting budget targets negatively impact employees?

  Demotivates them
• Regular reviews and adjustments can help address the limitation of rigidity