Using Budgets

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What is an expenditure budget?
a plan of the future expenses of a business or cost centre
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What is a cost centre?
a section of a business which incurs expenses
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What is a profit centre?
a section of a business which incurs expenses and generates proft so the profit of it can be calculated and a profit budget set
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What is a delegated budget?
given to a specific manager to manage and control (may also be involved in determinging size of budget)
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What are the benefits of budgeting?
controlling finances (reduce risk of over-spending, allocate more money to problem areas) and improving employee performance (objectives in the form of budgets, delegated budgets, increased responsibility)
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What are the potential drawbacks of budgeting?
conflicts - departments may compete with each other for more money, strong managers may negotiate bigger budgets even if not needed, short-term budget cuts could lead to long-term problems
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What is a variance?
the difference between a budgeted figure and the actual figure acheived
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What is a favourable variance?
a variance that means the business has made more profit than expected
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Why do favourable variances occur?
sales revenue was higher than expected or costs were lower than expected
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What is an adverse variance?
a variance that means the business has made less profit than expected
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Why do adverse variances occur?
when revenue is less than expected or costs are higher than expected
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What are some possible causes of favourable variances?
lower interest rates lead to an increase in sales, nad publicity for a competitor's products boost sales, unions agree to a wage settlement below expected rate of inflation, higher £ exchange rate makes imported components cheaper
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What are some possible causes of adverse variances?
competitors offer special price deals that lead to lower sales, staff efficiency falls, which leads to higher unit costs, oil price increase, rent increase
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What are the potential drawbacks if a manager decides to lower prices to increase sales and market compeititveness?
Are consumers sensitive to price changes? Elasticity of demand? Could this start a price war with rivals? Will it change perceived wuality image?
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What are the potential drawbacks if a manager decides to increase promotional spending?
it will affect the promotion budget, rivals might spend even more, may impact in he long-term
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What are the potential drawbacks if a manager decides to update the product range?
how long will it take? will new products be successful? new product development budget must be increased
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What are the potential drawbacks if a manager decides to look for new markets (e.g. new segments or new countries)?
market research cost will increase, products may need to be adapted to meet new market needs
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What are the potential drawbacks if a manager decides to obtain cheaper supplies of materials and components?
quality and reliability may be reduced, new suppliers may not be as relaible
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What are the potential drawbacks if a manager decides to cut wages?
motivation levels may be impacted, could leave to disruptive industrial action
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What are the potential drawbacks if a manager decides to increase labour productivity to reduce labour cost per unit?
may need new machinery and staff training - adding to costs in the short term
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What are the potential drawbacks if a manager decides to reduce waste levels?
may need a change in working practices or a new recycling policy - short-term benefits may be limited
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Card 2

Front

What is a cost centre?

Back

a section of a business which incurs expenses

Card 3

Front

What is a profit centre?

Back

Preview of the front of card 3

Card 4

Front

What is a delegated budget?

Back

Preview of the front of card 4

Card 5

Front

What are the benefits of budgeting?

Back

Preview of the front of card 5
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