budgeting

• What is a budget?

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

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

  Large businesses prepare budgets on a departmental basis or in relation to business functions.
• If a business has a budget based on its departments, which departments might be included?

  Departments such as marketing, purchasing, and human resources.
• What should all budgets be based on?

  All budgets should be objective driven, based on what the business is trying to achieve.
• 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 goal of increasing sales by 20%.
• What is the budgeting process in large businesses?

  1. Establish the aims and objectives of the business.

  2. Set production, marketing, and financial budgets.

  3. Break down the budget further into specific areas.

  4. Establish procedures for monitoring budgets.

  5. Examine and react to any variances from predicted budgets.

  6. Apply experience from previous budgets to future budgets.
• What are the three main functional budgets?

  Production, marketing, and financial budgets.
• What does the production budget focus on?

  The production budget focuses on putting output levels into practice and involves costs of purchasing raw materials and direct labor.
• What does the marketing budget combine?

  The marketing budget combines both revenues from predicted sales and costs from operating the marketing strategy.
• What is the basis of the financial budget?

  The financial budget is based on the business's cash flow forecast.
• What should be established for monitoring budgets?

  Procedures for monitoring budgets should be established, including collecting feedback and checking targets.
• What should be done with any variance from predicted budgets?

  Any variance from predicted budgets should be examined and reacted to.
• What is zero budgeting?

  Zero budgeting involves managers justifying all expenditure made from a clean slate.
• 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 problems can arise from the budgeting process?

  Problems include lack of commitment from excluded individuals and inflexible budgets that do not adapt to market changes.
• What is variance analysis in budgetary control?

  Variance analysis is the basis of budgetary control, focusing on unplanned changes from the budgeted figure.
• What is a favourable variance?

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

  An adverse variance occurs when expenditure is higher than expected or revenues are lower than expected.
• How is the total variance calculated?

  Total variance is calculated by comparing the actual figure with the budgeted figure and totaling the differences.
• What is the summary of budgeting's importance?

  • Budgets are important management tools.
  • They help with financial control and coordinating business activity.
  • They assist in motivating staff.
  • A poorly-prepared budget can waste time and demotivate staff.