P6 -
a) What is a budget?
b) What is the purpose of a budget?
c) What is the process of setting up a budget?
a) A budget is a financial plan where businesses draw out how much money
they’re expected to spend over a certain period of time. Budgets are drawn
up specifically for their profits, expenditure, income, cash flow and their
output. These categories are what businesses use to predict how much
they’re either going to spend or make within a certain period time (e.g. a
one-year period). After the time period is over, businesses compare their
budgeted amount to their actual amount that they have either made or
spent to see whether they have made an overall profit or loss.
b) The purpose of a budget is to see if businesses can perform better than
they have budgeted to be and be able to motivate the owners of
businesses to makes targets for the future in order to make a vast amount
of profit. Also, the purpose of a budget is to ensure that the owners of
businesses can maintain their costs and be able to control how they use
their costs efficiently in order to avoid losing profits.
c) The process of setting up a budget is where businesses create a sales
budget based on their objectives that they have set out and any market
research that has been carried out so far. Then, businesses make an
expenditure budget which is predicting how much they think they’re going
to spend, based on only the costs that are relevant to the business in order
to create the budgeted sales. Finally, businesses set goals and profit
targets by using the two budgets that they have just created which are the
sales budgets and the expenditure budgets in order to see how much
profit they’re predicted to make.
M4- Analyse the reasons why costs need to be controlled to budgets
First of all, costs are really important to a business like Hair to Wear Ltd because they need to pay for
what they need in order for them to operate efciently. Costs can change the performance of
businesses like Hair to Wear Ltd as it could either lead them to debt depending on how much proft
they generate or if it is controlled properly then Hair to Wear Ltd could avoid debts.
Costs need to be controlled to budgets because costs are one of the main factors that decide
whether Hair to Wear Ltd have made a proft or a loss. Also, Hair to Wear Ltd need to ensure that
they set the budgeted costs at a reasonable amount because if they set their budgeted costs at a low
amount and then ending up spending more on their actual costs then they wouldn’t be making as
much proft as they have expected. As a result of this, Hair to Wear Ltd will decrease their profts and
revenue. However, this depends on how accurate their budgeted sales and costs and how Hair to
Wear perform as a whole. This is because if their costs are lower than expected then they have a
favourable variance. For instance, if Hair to Wear budgeted to spend £350 on materials in November
and then ended up spending £300 instead then they will be making more proft than expected,
a) What is a budget?
b) What is the purpose of a budget?
c) What is the process of setting up a budget?
a) A budget is a financial plan where businesses draw out how much money
they’re expected to spend over a certain period of time. Budgets are drawn
up specifically for their profits, expenditure, income, cash flow and their
output. These categories are what businesses use to predict how much
they’re either going to spend or make within a certain period time (e.g. a
one-year period). After the time period is over, businesses compare their
budgeted amount to their actual amount that they have either made or
spent to see whether they have made an overall profit or loss.
b) The purpose of a budget is to see if businesses can perform better than
they have budgeted to be and be able to motivate the owners of
businesses to makes targets for the future in order to make a vast amount
of profit. Also, the purpose of a budget is to ensure that the owners of
businesses can maintain their costs and be able to control how they use
their costs efficiently in order to avoid losing profits.
c) The process of setting up a budget is where businesses create a sales
budget based on their objectives that they have set out and any market
research that has been carried out so far. Then, businesses make an
expenditure budget which is predicting how much they think they’re going
to spend, based on only the costs that are relevant to the business in order
to create the budgeted sales. Finally, businesses set goals and profit
targets by using the two budgets that they have just created which are the
sales budgets and the expenditure budgets in order to see how much
profit they’re predicted to make.
M4- Analyse the reasons why costs need to be controlled to budgets
First of all, costs are really important to a business like Hair to Wear Ltd because they need to pay for
what they need in order for them to operate efciently. Costs can change the performance of
businesses like Hair to Wear Ltd as it could either lead them to debt depending on how much proft
they generate or if it is controlled properly then Hair to Wear Ltd could avoid debts.
Costs need to be controlled to budgets because costs are one of the main factors that decide
whether Hair to Wear Ltd have made a proft or a loss. Also, Hair to Wear Ltd need to ensure that
they set the budgeted costs at a reasonable amount because if they set their budgeted costs at a low
amount and then ending up spending more on their actual costs then they wouldn’t be making as
much proft as they have expected. As a result of this, Hair to Wear Ltd will decrease their profts and
revenue. However, this depends on how accurate their budgeted sales and costs and how Hair to
Wear perform as a whole. This is because if their costs are lower than expected then they have a
favourable variance. For instance, if Hair to Wear budgeted to spend £350 on materials in November
and then ended up spending £300 instead then they will be making more proft than expected,
