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Financial Planning

Budgets

  • 6 things to know
  • Paper 2 and Paper 3

Overview

Historical and zero-based budgeting, what budgets do for control and coordination, and favourable and adverse variance analysis.

What you need to know

Answer each one before you reveal it.

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Process

What does a budget do for a business?

Key term

What is historical budgeting, and what does it help a business do?

Numbers

Define variance, and distinguish favourable from adverse.

Key term

Give examples of external factors that can make budget assumptions invalid.

Key term

Under what circumstances might budgets demotivate staff?

Numbers

State the budget-variance formula.

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is a budget?

    Model answer

    A financial plan for the future, typically covering a set period, that estimates income and expenditure.

  2. 2

    How do budgets help managers establish direction for their teams?

    Model answer

    Budgets enable managers to set financial targets and objectives for different departments or activities.

  3. 3

    How do budgets support the monitoring and control of business performance?

    Model answer

    They provide a basis for comparing actual results against planned figures, allowing managers to identify and address deviations.

  4. 4

    In what way do budgets help coordinate activities across an organisation?

    Model answer

    They ensure spending plans across different departments align with the overall business strategy.

  5. 5

    How can budgets act as a motivational tool for employees?

    Model answer

    By giving staff clear financial targets to work towards and responsibility for meeting them.

  6. 6

    Why do budgets improve communication within a business?

    Model answer

    They make financial expectations explicit across departments, ensuring everyone understands what is required.

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