A budget is a financial plan that a business or department sets for its costs and revenue , usually closely aligned with its business objectives .

How do budgets help managers compare performance across functions ?

Budgets let managers compare different departments at the same time , even when their roles differ. This supports fair decisions on bonuses, promotions or extra funding.

Define incremental budget .

An incremental budget is based on last year's figures , with small adjustments made to reflect expected changes such as inflation or wage rises.

True or False? Incremental budgets encourage managers to review all of their spending and innovate.

False. Incremental budgets can carry forward inefficiencies and discourage innovation , because departments may stick to old habits rather than reviewing their spending.

A ______ budget is adjusted depending on the level of output or sales.

A flexible budget is adjusted depending on the level of output or sales.

Define zero budgeting .

Zero budgeting is a method in which every department or manager must justify all spending , with each cost reviewed and approved individually rather than starting from last year's budget.

What are two disadvantages of zero budgeting?

Zero budgeting is time-consuming because every cost must be explained from scratch. Constant questioning of expenses may also demotivate staff or lead to underfunding important areas.

How do budgets help with control within a business?

Budgets set clear financial limits that help prevent overspending. Managers are accountable for staying within their budget, which improves discipline.

True or False? Budgets can be used to monitor non-financial performance, such as spending on training or customer service.

True. Budgets can track spending on non-financial goals such as customer service, training or sustainability, ensuring resources support wider business objectives .

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.

In a costs budget, an actual figure lower than the budgeted figure is a ________ variance.

In a costs budget, an actual figure lower than the budgeted figure is a favourable variance.

How is a profit variance calculated?

A profit variance is calculated using this formula: Profit variance = Actual profit − Budgeted profit

True or False? Budgets are always reliable because they are based on accurate data.

False. Budgets are based on forecasts and assumptions , so managers may make inappropriate decisions if market conditions change or estimates are wrong.

Why might managers deliberately overestimate cost forecasts when setting budgets?

Managers may overestimate costs or understate sales to make targets easier to beat . This reduces the accuracy of the budget.

A LevelBusinessCambridge (CIE)Flashcards5. Finance & AccountingBudgets

Budgets (Cambridge (CIE) A Level Business): Flashcards

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Cards in this collection (14)

Define budget.
A budget is a financial plan that a business or department sets for its costs and revenue, usually closely aligned with its business objectives.
How do budgets help managers compare performance across functions?
Budgets let managers compare different departments at the same time, even when their roles differ. This supports fair decisions on bonuses, promotions or extra funding.
Define incremental budget.
An incremental budget is based on last year's figures, with small adjustments made to reflect expected changes such as inflation or wage rises.
True or False?
Incremental budgets encourage managers to review all of their spending and innovate.
False.
Incremental budgets can carry forward inefficiencies and discourage innovation, because departments may stick to old habits rather than reviewing their spending.
A ______ budget is adjusted depending on the level of output or sales.
A flexible budget is adjusted depending on the level of output or sales.
Define zero budgeting.
Zero budgeting is a method in which every department or manager must justify all spending, with each cost reviewed and approved individually rather than starting from last year's budget.
What are two disadvantages of zero budgeting?
Zero budgeting is time-consuming because every cost must be explained from scratch. Constant questioning of expenses may also demotivate staff or lead to underfunding important areas.
How do budgets help with control within a business?
Budgets set clear financial limits that help prevent overspending. Managers are accountable for staying within their budget, which improves discipline.
True or False?
Budgets can be used to monitor non-financial performance, such as spending on training or customer service.
True.
Budgets can track spending on non-financial goals such as customer service, training or sustainability, ensuring resources support wider business objectives.
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.
In a costs budget, an actual figure lower than the budgeted figure is a ________ variance.
In a costs budget, an actual figure lower than the budgeted figure is a favourable variance.
How is a profit variance calculated?
A profit variance is calculated using this formula:
Profit variance = Actual profit − Budgeted profit
True or False?
Budgets are always reliable because they are based on accurate data.
False.
Budgets are based on forecasts and assumptions, so managers may make inappropriate decisions if market conditions change or estimates are wrong.
Why might managers deliberately overestimate cost forecasts when setting budgets?
Managers may overestimate costs or understate sales to make targets easier to beat. This reduces the accuracy of the budget.

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