T33- Budgets

• what is the purpose of budgeting?

  • used in a business plan to raise finance
  • control & monitoring
  • to plan ahead
  • coordination (if you have many different departments)
  • communicates objectives and targets
  • motivation - achieve targets
• what is revenue/ income budget?

  • expected revenues and sales
  • broken down into more detail
• what is cost/ expenditure budget?

  • expected costs based on sales budget
  • overheads and other fixed costs
• what is a profit budget?

  • based on combined sales and cost budgets
  • of great interest to stake holders
  • may for basis for performance bonus
• What are historical budgets?

  • use last years figure as the basis for budget
  • realistic in that based on actual figures
  • however, circumstances may have changes (e.g. lost customers, new products, credit crunch
  • does not encourage efficiency
• what are zero based budgets?

  • budgeted costs & revenues are set at 0
  • budget is based on new proposals for sales and costs
  • makes budgeting more complicated and time consuming
  • potentially more realistic
• what are the difficulties for sales forecasting in budgeting?

  • harder when market experiences rapid change (e.g. new technology)
  • start-up firms find it hard to estimate likely sales and revenues
  • competitiors actions are difficult to predict
• what makes cost difficult in budgeting?

  • always likely to be unexpected costs
  • will vary depending on the sales budgeting
  • changes in external environment will impact costs (e.g. taxes, exchange rates)
• what is variance analysis?


  calculating and investigating the difference between actual results and budgeting
• what are the two types of variances?

  • positive/ favourable (better than expected)
  • adverse/ unfavourable (worse than expected)
• what are favourable variances?

  • actual figures are better than budgeted figure
  • e.g. costs lower than expected
  • e.g. revenue/profits higher than expected
• what are adverse variances?

  • actual figures are worse than budgeted figures
  • e.g. costs higher than expected
  • revenue/ profits lower than expected
• what are causes of favourable variances?

  • stronger market demand than expected
  • selling price increased higher than budget
  • cautious sales and cost assumptions
  • competitors weakness
  • better productivity or efficiency
• what are causes of adverse variances?

  • unexpected events lead to un-budgeted costs
  • over spends by budget holders
  • sales forecast proved over optimistic
  • market conditions (selling prices lower than budget)
• how is setting budgets difficult?

  • Problems may arise as the data is based on historical figures
  • if the sales data is inaccurate so will be the rest of the budget
  • Setting budgets may lead to conflict between departments as they compete for limited resources
  • Budgets take a lot of time to prepare and manage this time could’ve been spent elsewhere in the business
  • Sometimes budgets set over ambitious objectives to the point where they become meaningless
• why is motivation difficult when budgeting?

  • if workers are left out of the budget process, they can become demotivated especially if the budget is set too high of targets
• why does inflexibility make it difficult during budgeting?

  sometimes budgets can constrain businesses which effect decision making
• how does short-termism affect budgeting?

  Some managers may be focused on making short tern decisions to keep within the current budget but this could affect the businesses long Term performance.
• what are some behavioural implications of budgets?

  • Budgets are demotivating if they are imposed rather than negotiated
  • Setting unrealistic targets adds to de-motivation
  • Budgets can contribute to departmental rivalry- battles-over budget allocation
  • Spending up to budget: it can result in ‘use it or lose it’ mentality -spend up to the budget to preserve It for next year