2.2.4 Budgets

What is the definition of budget?

A budget is a financial target for the furture, covering revenue and expenditure over a certain period of time.

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Why would a business have a budget?

So they can know where they are spending the money and which department are spending too much, and which areas need to have a budget cut.

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What is income budget?

These can be motivating for the business given the target. If these budgets are reasonable and realistic then employees will want to do their best to reach these targets.

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What is expenditure budget?

Set spending limits for the business and separate departments or individuals within the business.

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What is profit budget?

Project target profit levels for the business. This motivates employees and allows to check actual results vs targets.

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What is historical budgets?

Historical budgeting takes into account the actual performance to the previous time period, and use it as the 'base' to predict future performance. They'll look at potential changes that may occure, such as: Price increases and new product launches.

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What is zero based budgeting?

Zero based budget is named as it makes no assumptions about previous performance.

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Favourable variance occurs when:

Revenue/ profit are higher than expected
Cost/ expenditure are lower than expected

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Adverse variance occurs when:

Revenue/ profit was lower than expected
Cost/ expenditure were higher than expected

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Get Revising

2.2.4 Budgets

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