Ω
Name:
Date Taken:
Class:
Total Possible Marks: 33
Budgeting Basics
Complete the following questions in the time allowed by
your teacher
QUICK DEFINITIONS
Write a short, accurate definition for each of the following key terms. (2 marks for each
good quality definition)
2
2
2
2
1
1
1. Define: budget
2. Define: variance
3. Define: variance analysis
4. Define: budget holder
5. Define: favourable variance
6. Define; adverse variance
www.tutor2u.net
-1-
Ω
-2-
QUICK LISTS
In this section, provide an outline or list points which answer the question
4
7. Identify four different purposes of budgeting by management:
A.
B.
C.
D.
E.
F.
4
8. List three typical kinds of budget that you would expect to see in a well-managed
business
A.
B.
C.
D.
E.
3
9. List three possible reasons why actual sales might be lower than budget
A.
B.
C.
D.
E.
www.tutor2u.net
-2-
Ω
-3-
Short Answers
In this section, write a short answer (one or two sentences) for each question.
4
10. Explain how "historical budgeting" is different from "zero-based" budgeting
www.tutor2u.net
-3-
Ω
-44
4
11. Explain (using an example for each) the difference between favourable and
adverse budget variances
12. Outline some of the potential problems and limitations of budgeting in a business
www.tutor2u.net
-4-
Ω
Name:
Date Taken:
Class:
Total Possible Marks: 33
Budgeting Basics
Complete the following questions in the time allowed by
your teacher
QUICK DEFINITIONS
Write a short, accurate definition for each of the following key terms. (2 marks for each
good quality definition)
2
1. Define: budget
Answer: A financial plan for the future concerning the revenues and costs of a business
2
2. Define: variance
Answer: the difference between the budgeted amount and actual amount for each item in a budget
2
3. Define: variance analysis
Answer: the process of identifying, analysing and evaluating the reasons for variances between
budgeted and actual figures
2
4. Define: budget holder
Answer The individual responsible for meeting the budgeted targets (e.g. sales to be achieved or
costs to be incurred) and who makes decisions about how budgeted resources are used
1
5. Define: favourable variance
Where actual results are better than budgeted (e.g. revenues are higher, costs are
lower, or profits are higher)
1
6. Define; adverse variance
Where actual results are worse than budgeted (e.g. revenues are lower, costs are
higher, or profits are lower)
www.tutor2u.net
-1-
Ω
-2-
QUICK LISTS
In this section, provide an outline or list points which answer the question
4
7. Identify four different purposes of budgeting by management:
A. Establish priorities & set targets
B. Provide direction and co-ordination
C. Assign responsibilities
D. Allocate resources
E. Motivate staff (e.g. linking rewards to beating budget)
F. Monitor performance
4
8. List three typical kinds of budget that you would expect to see in a well-managed
business
A. Sales or revenue budget (e.g. by product, brand, market)
B. Expenditure budget (e.g. by activity, location)
C. Cash flow budget
D. Profit budget (bringing together the sales and expenditure budget)
E. Capital spending budget - amounts that are authorised to be spent on capital
projects
3
9. List three possible reasons why actual sales might be lower than budget
A. Inaccurate or over-optimistic budgeting (e.g. over-estimate of market size or
growth)
B. Lower demand than expected due to weak market conditions (i.e. overall
market sales lower)
C. Competitor actions result in lower market share (e.g. a price reduction or
better quality results in lost customers)
D. Capacity was not sufficient to meet budgeted demand (e.g. a breakdown in
machinery, difficulties recruiting staff or unable to open new budgeted
locations)
E. Loss of distribution - e.g. retailers / wholesalers decide not to list expected
products
www.tutor2u.net
-2-
Ω
-3-
Short Answers
In this section, write a short answer (one or two sentences) for each question.
4
10. Explain how "historical budgeting" is different from "zero-based" budgeting
Valid points include:
Historical budgeting:
Use last year’s figures as the basis for the budget
Realistic in that it is based on actual results
However, circumstances may have changed (e.g. new products, lost customers,
credit crunch)
Does not encourage efficiency
Zero budgeting:
Budgeted costs & revenues are set to zero
Budget is based on new proposals for sales and costs - i.e. built from the
bottom-up
Makes budgeting more complicated and time-consuming, but potentially more
realistic
www.tutor2u.net
-3-
Ω
-44
11. Explain (using an example for each) the difference between favourable and
adverse budget variances
Valid points include:
Favourable variances - where actual figures are better than budgeted figure
E.g.
costs lower than expected
revenue/profits higher than expected
Adverse variances - where actual figures are worse than budget figure
e.g.
costs higher than expected
revenue/profits lower than expected
4
12. Outline some of the potential problems and limitations of budgeting in a business
Valid points include:
The quality of the budget is only as good as the data being used
Budgets can lead to inflexibility in decision-making
Need to be changed as circumstances change
Take time to complete and manage (e.g. setting, monitoring)
Can result in short term decisions to keep within the budget rather than the right
long term decision which exceeds the budget
Budgets are de-motivating if they are imposed rather than negotiated
Setting unrealistic targets adds to de-motivation
www.tutor2u.net
-4-