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This set of flashcards covers key concepts related to budgets, their types, advantages, disadvantages, and an introduction to variance analysis, including favourable and adverse variances and their causes.
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What is a budget?
A plan and a forecast for the future finances of a business.
What is an expenditure budget?
A limit placed on the amount to be spent in a given period of time, which can be split by department, function, or product.
What is an income budget?
A target set for the amount of revenues predicted to be achieved in a set time period, which can be split by products, services, or departments.
What is a profit budget?
A target set for the surplus between income and expenditure in a given period of time, used to manage profit levels.
What are the advantages of setting budgets?
They help plan for the future, minimize expenditure, maximize income, inform decision-making, monitor performance, and motivate individuals.
What are the disadvantages or problems of setting budgets?
They are dependent upon predictions and forecasts, subject to change, can have associated opportunity costs, are affected by competitor actions, managers may lack experience, can be subject to bias, may seem unrealistic, and take time to produce.
What is a variance in financial performance?
The difference between the budget and the actual performance.
How is variance calculated?
Actual minus Budget.
What is a favourable variance?
One that is good for the business, such as expenditure lower than budget, income higher than budget, or profit higher than budget.
What is an adverse variance?
One that is bad for the business, such as expenditure higher than budget, income lower than budget, or profit lower than budget.
What are possible causes of variances?
Actions of competitors, actions of suppliers, changes in the economy (e.g., interest rates, minimum wage), internal inefficiency, and poor management.