Term
Budget
What is a budget?
Answer
Definition
A financial plan detailing expected income and expenditure for a future period.
A structured review of core financial planning and control mechanisms essential for organizational management.
A budget is a financial plan detailing expected income and expenditure for a future period. It acts as a target or guideline for managing resources and controlling costs.
A variance is the difference between budgeted (planned) figures and actual results, signaling where performance diverged from targets.
Calculating the difference is the first step in performance analysis.
Evaluation and Guidance: Budgets guide resource use and financial control, improving efficiency and planning. Variance analysis provides feedback and helps adapt to changing circumstances. Supports motivation when linked to performance targets.
While invaluable, financial planning tools are not without drawbacks.
What is a budget?
A financial plan detailing expected income and expenditure for a future period.
What is the main purpose of a budget?
To act as a target or guideline for managing resources and controlling costs.
Name three common types of budgets.
Sales budget, production budget, cash budget.
What is a variance in budgeting?
The difference between budgeted (planned) figures and actual results.
What is a favourable variance?
When actual results are better than budgeted, like lower costs or higher revenues.
What is an adverse variance?
When actual results are worse than budgeted, such as higher costs or lower revenues.
How is variance calculated?
Variance = Actual Result − Budgeted Amount.
What does a favourable cost variance indicate?
Cost savings or spending less than budgeted.
What does a favourable revenue variance indicate?
Revenue higher than budgeted.
Why is variance analysis important?
It helps identify causes of differences and enables corrective actions.
How does budgeting help businesses?
By guiding resource use, controlling costs, and supporting efficient planning.
What are some limitations of budgeting?
They can be time-consuming, may cause conflict if unrealistic, and some variances reflect uncontrollable factors.