Understanding Budgets and Variances

Fill the gaps: A budget is a ________________ for the future concerning the revenues and costs of a business.

• financial plan

• expenditure

• performance

• objectives

Answer explanation

A budget is a financial plan that outlines expected revenues and costs for a business in the future. This makes 'financial plan' the correct choice, as it accurately describes the purpose of a budget.

Fill the gaps: Budgets for sales/revenue and ____________ are prepared in advance and then compared with actual performance to establish any _______________.

• managers; variances

• expenditure; variances

• objectives; resources

• employees; performance

Answer explanation

The correct choice is 'expenditure; variances' because budgets are typically prepared for both sales/revenue and expenditures. Comparing these budgets with actual performance helps identify variances.

Fill the gaps: ____________ are responsible for controllable costs within their budgets and are required to take remedial action if ______________ variances arise and they are considered excessive.

• Managers; favourable or adverse

• Employees; traditional

• Resources; financial plan

• Objectives; targets

Answer explanation

Managers are accountable for controllable costs in their budgets and must address any variances, whether favourable or adverse, that exceed acceptable limits.

Anagrams: What budgeting term is hidden in the anagram "Salivary as in acne"?

• Variance analysis

• Financial plan

• Budget holder

• Revenue stream

Answer explanation

The anagram "Salivary as in acne" can be rearranged to spell "Variance analysis," which is a budgeting term used to compare actual financial performance to budgeted figures.

True or false? Managers should only be concerned about adverse variances.

• True

• False

Answer explanation

False. Managers should be concerned about both adverse and favorable variances. Adverse variances indicate problems, while favorable variances can highlight areas of success that should be maintained or expanded.

True or false? A budget can be used to help with employee motivation.

• True

• False

Answer explanation

True. A budget can motivate employees by providing clear financial goals, encouraging accountability, and fostering a sense of ownership over resources, which can enhance engagement and performance.

Calculate the variance for sales revenue: Budgeted £1,200,000, Actual £1,250,000.

• £50,000 adverse

• £50,000 favourable

• £100,000 adverse

• £100,000 favourable

Answer explanation

The variance is calculated as Actual - Budgeted. Here, £1,250,000 - £1,200,000 = £50,000. Since the actual sales are higher than budgeted, this is a £50,000 favourable variance.

Calculate the variance for total expenditure: Budgeted £945,000, Actual £956,000.

• £11,000 adverse

• £11,000 favourable

• £20,000 adverse

• £20,000 favourable

Answer explanation

The variance is calculated as Actual - Budgeted. Here, £956,000 - £945,000 = £11,000. Since the actual expenditure is higher than the budgeted amount, it is an adverse variance.

Briefly explain one reason why a sales revenue budget might be higher than forecast.

• Increased market demand

• Decreased production costs

• Lower employee turnover

• Reduced advertising expenses

Answer explanation

Increased market demand can lead to higher sales revenue as more customers are willing to purchase products, surpassing initial forecasts. This surge in demand directly impacts revenue positively.

Briefly explain another reason why a sales revenue budget might be higher than forecast.

• New product launch

• Increased competition

• Higher tax rates

• Economic recession

Answer explanation

A new product launch can drive higher sales revenue than forecasted due to increased customer interest and demand, leading to greater sales than initially anticipated.