3.9 - Budgets - HL

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11 Terms

1
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What is a cost centre?

The departments of a business that incur costs, and are not involved in making any products, such as a factory or human resources

2
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What is a profit centre?

The departments of a business that incur costs but also have revenue, so they are making profits

3
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What are advantages of cost and profit centers?

The performance of individual parts of the business can be assessed - it allows for organization and control as you can see which department makes the most profit

Financial decisions can be made on a local scale which fit to that department

It identifies areas of weakness

4
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What are disadvantages of cost and profit centers?

May cause rivalry between different departments

It is not always straightforward to know where to allocate costs, e.g., human resources may have caused some indirect costs, but it is put under the costs of financial department

5
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What is a budget?

It is a plan for a business which shows expected the costs and revenues in a given time period. These can be set for the whole business or individual cost and profit centers.

6
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What is a variance?

It is the comparison between the firms budget and its actual expenditure. The 2 types of variance are adverse and favourable

7
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What is adverse variance?

This is a difference between the budget and the actual figures which is negative to the business.

<p>This is a difference between the budget and the actual figures which is negative to the business. </p>
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What is favourable variance?

A difference between the budget and the actual figures that is positive to the business

<p>A difference between the budget and the actual figures that is positive to the business</p>
9
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An example of what a budget and variance sheet looks like

knowt flashcard image
10
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What are reasons for setting budgets?

  • It allows businesses to plan for the future and see what they can afford. It can help them to overcome financial problems

  • It helps businesses distribute finance across different departments and allow for coordination

  • It prevents overspending

  • It motivates managers and employees, as they gain responsibility

11
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What are disadvantages of budgets?

  • If budgets are unrealistic it can be demotivating if these are not achieved

  • time consuming to prepare and constantly update