Budgets (AQA A Level Business): Flashcards
Exam code: 7132
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Define budget.
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Cards in this collection (25)
Define budget.
A budget is a financial plan that sets out expected income, spending or profit over a future period.
How does a budget help a business with control?
Actual performance is compared against the budget at regular intervals, so problems are identified early and corrective action can be taken.
Budgets aid __________ by ensuring that different departments work towards the same financial goals.
Budgets aid coordination by ensuring that different departments work towards the same financial goals.
True or False?
Budgets are more motivating when managers are involved in setting them.
True.
Being involved in setting the budget increases managers' sense of ownership and accountability, which makes it more motivating than figures imposed by senior management.
How does preparing a budget help a business with planning?
It forces managers to forecast sales and anticipate costs, so the business can prepare for challenges rather than simply react to them.
How do budgets support decision-making?
Budgets provide a financial framework to assess whether the business can afford a decision, such as hiring staff, and what impact it will have on profit.
What are the three types of budget a business can set?
A business can set revenue, expenditure and profit budgets.
Define incremental budgeting.
Incremental budgeting uses the previous year's budget as a starting point and adjusts it by a set amount or percentage to reflect expected changes.
In what type of environment does incremental budgeting work well?
Incremental budgeting works well in stable environments, where spending patterns do not change significantly from year to year.
True or False?
Incremental budgeting removes past inefficiencies from a department's spending.
False.
Incremental budgeting tends to lock in past inefficiencies, because any waste from last year is built into next year's budget.
Define zero-based budgeting.
Zero-based budgeting starts from scratch every budget period, so every department must justify all of its planned spending from zero.
What is one drawback of zero-based budgeting?
It is extremely time-consuming and resource-intensive, as managers must justify every line of expenditure in detail.
Zero-based budgeting is particularly effective when a business is ___________, facing financial pressure or entering a new market.
Zero-based budgeting is particularly effective when a business is restructuring, facing financial pressure or entering a new market.
Define budget variance.
A budget variance is the difference between the budgeted figure and the actual figure achieved by the end of the budgetary period.
Variance = Actual figure − Budgeted figure
What is the purpose of variance analysis?
Variance analysis compares actual performance to the targets set in the budget so that managers can find the reasons for the differences.
Define adverse variance.
An adverse variance (A) is where the actual figure achieved is worse than the budgeted figure.
What are two causes of an adverse cost variance?
Two causes are raw material prices rising unexpectedly and wage increases above those anticipated in the budget.
Define favourable variance.
A favourable variance (F) is where the actual figure achieved is better than the budgeted figure.
True or False?
Actual costs that are higher than budgeted give an adverse cost variance.
True.
For costs, higher-than-budgeted spending is an adverse variance, while lower-than-budgeted spending is favourable.
A competitor leaving the market may lead to a favourable ____ variance.
A competitor leaving the market may lead to a favourable income variance.
Budgeted profit is £0.80m and actual profit is £0.98m. What is the profit variance?
The profit variance is £0.98m − £0.80m = £0.18m F. It is favourable because actual profit is higher than budgeted.
True or False?
An adverse variance is always a sign of poor management.
False.
External factors, such as a rise in global commodity prices or a fall in consumer confidence, may be outside the business's control.
Why might a favourable cost variance not be good news?
Costs well below budget may mean the business has underinvested in staff, quality or marketing, which could harm future performance.
When analysing a variance, managers should ask whether its cause is ______ or external to the business.
When analysing a variance, managers should ask whether its cause is internal or external to the business.
How can an adverse variance in one area connect to a favourable variance in another?
Lower sales can lead to lower production costs, so an adverse revenue variance may come with a favourable cost variance.
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