9609 · 5.5.1
The meaning and purpose of budgets flashcards
Revision flashcards for Cambridge 9609 The meaning and purpose of budgets (syllabus 5.5.1). Flip, recall, then mark a real past-paper question.
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What is a budget?
A financial plan showing expected income and expenditure over a future period.
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Four purposes of budgeting?
Planning, coordination, control (monitoring), motivation/communication.
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Sales budget role?
Usually the starting point — forecast units/revenue drives production and purchases.
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Production budget?
Units to produce = budgeted sales + desired closing inventory − opening inventory.
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Cash budget purpose?
Forecasts cash inflows and outflows to avoid liquidity problems.
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Master budget?
The complete set of interlinked budgets for the whole organisation.
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Benefit of budgeting?
Sets targets, allocates resources, identifies problems early.
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Drawback of budgeting?
Time-consuming; may demotivate if unrealistic; rapid change makes plans outdated.
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What is a Master Budget?
A summary of all of a company's individual budgets, consisting of operating budgets (like sales and production) and financial budgets (like the cash budget and budgeted balance sheet). It represents the overall financial plan.
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Define Zero-Based Budgeting (ZBB).
A budgeting method where all expenses must be justified for each new period. Every function is analysed for its needs and costs, starting from a 'zero base', rather than using the previous year's budget as a starting point.
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What is Variance Analysis?
The process of comparing actual results against budgeted figures to identify differences, known as variances. These can be 'favourable' (better than budget) or 'adverse' (worse than budget) and are used for management control.
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What is meant by Delegated Budgeting?
A process where the authority and responsibility for setting and managing a budget are passed down to junior or middle managers. This can increase motivation and accountability but requires effective monitoring.
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What is an Adverse Variance?
A variance that occurs when actual results are worse than the budgeted figure. For example, when actual costs are higher than budgeted costs, or actual revenue is lower than budgeted revenue.