Budgeting

Flashcard 1: What is a Budget?

Q: What is a budget?
A: A detailed financial plan that outlines expected income and expenditure for a future period.

Flashcard 2: Why Are Budgets Important?

Q: Why do businesses use budgets?
A: To provide direction, help with planning, and measure performance.

Flashcard 3: Purpose of Budgets

Q: What are the key purposes of budgets?
A:

  • Planning

  • Allocating resources

  • Setting targets

  • Coordinating departments

  • Monitoring and controlling

  • Modifying decisions

  • Assessing performance

Flashcard 4: Budget vs. Forecast

Q: How is a budget different from a forecast?
A:

  • Budget = A plan for the future.

  • Forecast = A prediction of the future based on conditions.

Flashcard 5: Key Features of Budgeting

Q: What are the key features of budgeting?
A:

  • Not a forecast (budgets are plans, not predictions).

  • Applies to any measurable operation.

  • Requires coordination between departments.

  • Involves employees responsible for targets.

  • Delegated budgets improve motivation.

Flashcard 6: Delegated Budgeting

Q: What is delegated budgeting?
A: Giving junior managers authority over setting and managing budgets to improve motivation.

Flashcard 7: Steps in Budget Preparation

Q: What are the key steps in preparing a budget?
A:

  1. Set objectives & strategies.

  2. Identify the key limiting factor (usually sales).

  3. Prepare the sales budget.

  4. Prepare subsidiary budgets (cost, labor, admin, cash).

  5. Coordinate all budgets.

  6. Create a master budget.

  7. Present to the board.

Flashcard 8: What is Incremental Budgeting?

Q: How does incremental budgeting work?
A: It uses last year’s budget as a base and adjusts it for inflation or other factors.

Flashcard 9: Advantages of Incremental Budgeting

Q: What are the benefits of incremental budgeting?
A:
✔ Simple & quick
✔ Easy to implement
✔ Stable & consistent planning

Flashcard 10: Limitations of Incremental Budgeting

Q: What are the disadvantages of incremental budgeting?
A:
❌ Does not challenge inefficiencies
❌ Can lead to unnecessary spending
❌ Ignores changes in business conditions

Flashcard 11: What is Zero-Based Budgeting (ZBB)?

Q: How does zero-based budgeting work?
A: Budgets start at zero each year, and managers must justify every expense.

Flashcard 12: Advantages of Zero-Based Budgeting

Q: What are the benefits of zero-based budgeting?
A:
✔ Encourages efficiency
✔ Prevents unnecessary spending
✔ Ensures resources are allocated properly

Flashcard 13: Limitations of Zero-Based Budgeting

Q: What are the drawbacks of zero-based budgeting?
A:
❌ Time-consuming
❌ Requires detailed justification
❌ Can demotivate employees

Flashcard 14: What is Flexible Budgeting?

Q: How does flexible budgeting work?
A: Adjusts budgets based on actual sales or production levels.

Flashcard 15: Advantages of Flexible Budgeting

Q: What are the benefits of flexible budgeting?
A:
✔ Adapts to business performance
✔ Allows better variance analysis
✔ More realistic financial planning

Flashcard 16: Limitations of Flexible Budgeting

Q: What are the drawbacks of flexible budgeting?
A:
❌ Requires constant monitoring
❌ Complex to manage
❌ Can cause uncertainty in financial planning

Flashcard 17: What is Variance Analysis?

Q: What is variance analysis?
A: The process of comparing budgeted figures with actual results to measure performance.

Flashcard 18: Importance of Variance Analysis

Q: Why is variance analysis important?
A:

  • Identifies budget deviations.

  • Helps improve future budgets.

  • Assists decision-making.

Flashcard 19: What is a Favorable Variance?

Q: What is a favorable variance?
A:
✅ Budgeted cost > Actual cost
✅ Budgeted revenue < Actual revenue

Flashcard 20: What is an Adverse Variance?

Q: What is an adverse variance?
A:
❌ Budgeted cost < Actual cost
❌ Budgeted revenue > Actual revenue

Flashcard 21: Limitations of Budgeting

Q: What are the main limitations of budgeting?
A:
❌ Lack of flexibility
❌ Short-term focus
❌ Encourages unnecessary spending
❌ Time-consuming for new projects
❌ May require additional training

Flashcard 22: Evaluating Budgeting

Q: What are the pros and cons of budgeting?
A:
✅ Pros: Helps assess performance, provides direction, and supports financial planning.
❌ Cons: Time-consuming, inflexible, and may not reflect rapid changes.