Business Studies

Question	Answer
Standard Coasting	The method involves calculating the planned costs of producing each product and then comparing them to the actual costs incurred. The difference between the standard cost (budgeted) and the actual cost is called a variance. Standard costing helps a business to manage and control costs, for example; if it costs more than expected to make a product, the business can investigate why!
Standard Costing - Adverse + Favourable	Adverse = Actual cost is higher than the standard cost. Favourable = Actual cost is lower than the standard cost.
Advantages of standard costing	-Can identify areas of weakness and inefficient practice -Staff can be motivated to achieve within cost targets - They can represent the best estimate of what a product should cost to make -Helps to control costs
Disadvantages of Standard Costing	-Requires the business to gather information which is time consuming and expensive -This method makes workers strive for favourable variance so they might take short cuts to reduce costs. - Got to regularly update standard cost as price increase e.g raw materials, minimum wage.
What is the definition of a budget?	A budget is a financial plan for the future which forecasts future earnings and future spending.
What are 2 characteristics of budgets?	-A budget includes targets for costs or revenue that a business or department must aim to reach over a given period of time, usually a year. -Most businesses use budgets
What is an income budget?	This forecasts the amount of money that will come into the business as revenue. To do this the business needs to know how much they expect to sell, so they produce sale forecasts.
What is an expenditure budget?	This forecasts what total costs will be for the year. To do this the business needs to know how much they expect to produce.
What is a profit budget?	This uses the totals from the income and the expenditure budgets to calculate what the expected profit or loss will be of the year.
What are two advantages of budgets?	1. They control income and expenditures 2. They allow departments to co-ordinate spending.
What are two disadvantages of budgets?	1. Time consuming 2. Too much focus is placed on them and not the customers
Summarise how budgets are put together?	-Often put together buy individual department, then used to produce budgets for the whole business. -New businesses have to develop their budgets from scrap, whereas established businesses can use budgets from previous years.
What are two reasons why a firm budgets?	-To motivate staff -To enable spending power to be delegated to local managers.
What is a benefit of having a fixed budget?	-Means that budget holders must stick to their budget throughout the year -Good control of cashflow
What information is needed to prepare an income budget?	Businesses must research and predict what sales they will make during the year. From this they can predict sales revenue. They often produce a sales forecast to help them.
What information is needed to prepare an expenditure budget?	Businesses much research the costs they will have to cover darning the year.
What is a zero budget?	This sets each departments budget at zero, it then demands that budget holders fully justify every £1 they're asking for. This is often used by new start-up businesses.
Why can budgets be hard to sick to?	-If staff don't have the right skills they cant manage budgets well. -High levels of waste can also cause budgets to be hard to sick to.
Variances	- This occurs when the difference between the figures in the budget and the actual figures lead to a firms profits being lower than planned. - Income and sales BELOW the budgeted figure - Expenditure and costs MORE than budgeted
Favourable Variances	This occurs when the difference between the figures in the budget and the actual figures lead to a firms profits being higher than planned. -Income and sales MORE than budgeted -Expenditure and costs BELOW the budgeted figure.
Internal causes of Variance	-Improving efficiency can cause a favourable variance. -Overestimating income and underestimating costs causes adverse variances. -Cutting prices can affect the income budget: how depends on how this affects demand (PED). -Poor budget management often causes adverse variances.
External causes of variances	- What the competition are doing can affect budgets. - Changing tastes/ fashions can also affect budgets and cause variances -Changes in the economy causes variances, for example, wages may go up in a boom period - Suppliers can also cause variance for example, they might put up prices of raw materials.
Qualitative Factors in Investment Appraisal 1	Company Objectives: Does the investment help achieve the company objectives Company Strategy: Does the investment support or hinder the strategy Company Finances: Can the business afford the investment and how are they going to raise the funding Accuracy of Data: How accurate are the cash flow forecasts, what evidence are they based on,
Qualitative Factors in Investment Appraisal 2	Risk: How risky is the investment Staff: Will more/ less/ different staff be needed or is training required Economy: Is the investment wise in the current economic climate Image: Will the investment improve/ damage the company image Subjectivity: Will the investment benefit the business or is just someones personal preference.
Net Present Value	- Looks at how the money you have invested will depreciate in value over the timespan of the investment. E.g What you can buy with £100 now is less than what you can buy with £100 in 5 years time. - Positive NPV means its a good investment. The higher the NPV, the better the money is holding in value. -Negative NPV, means they would never invest.
Advantages of Net Present Value	-Shows you the value of the investment in the future -Unlike ARR it does take account of the net return of each year.
Disadvantages of Net Present Value	-Does not show you the profitability of the investment (unlike ARR) -Assumes discount factors will be consistent each year. Choosing the discount rate is also subjective.
Disadvantages of Payback	-Ignores profitability from the investment -Leads to "short termism" approach -Ignores what happens after the payback period.
Advantages of Payback	-Does look at the timing of the cashflow -Very important method for companies with weak cashflow -Relatively easy to calculate --- even for a new entrepreneur.

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	Created by katie.langridge over 8 years ago