GCE Economics and Business by VII9jovw

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									GCE Business Studies

Unit 2: Managing the Business
2.3.3a How does a company budget
efficiently?

Article 1: Children in Need 2011

In November 2011, a group of sixth form Business Studies students at an academy in Derby,
decided to organise and manage a number of activities in an effort to raise money for the BBC
Children in Need Charity.

The principal of the academy gave the students a loan of £400 in order to buy the materials and
hire equipment necessary for the fund raising activities. He also offered the students
contingency finance for £100. These activities included Sponge the Teacher, a Bouncy Castle
for the Year 7s, a 24 hour Sportathon and a number of stalls selling anything from jewellery to
Krispy Kreme doughnuts.

Below is an extract from the various activity budgets and sales forecasts.

Activity      Budgeted       Actual         Cost           Sales             Sales        Net
              Cost £s        Cost £s        Variance £s    Forecast £s       Actual £s    Incomes £s
Bouncy        100            100            X              200               220          A
Castle
Jewellery     30             40             Y              120               60           B
Enterprise
Krispy        80             160            Z              240               440          C
Kremes
                                                                             TOTAL        D
                                                                             Net Income


Article 2: A Leak too far

Gregor Grebla and his family emigrated from Poland to live in
Nottingham in 2008. By trade, Gregor was a self-employed plumber.
He and his family decided to emigrate to the UK given the number of
relatively well paid work opportunities for Gregor, mainly thanks to
the growth in the UK home refurbishment market.

Business went well during Gregor’s first year in Nottingham. His
competitive rates and customers ‘word of mouth’ meant that Gregor
often had full order books and found himself overtrading. Half way
through 2010, despite the extensive work load and his excellent
reputation, Gregor gradually discovered he was experiencing cash-
flow problems.

When Gregor set up business in Nottingham, he needed to buy extra tools and new equipment.
He relied on his savings to pay for these costs. As the business thrived, he decided to buy a
small van in order to carry all the tools, equipment and materials he needed to complete his
jobs.

Sadly, by the summer of 2011, three years after arriving in the UK, Gregor was declared
bankrupt thanks to his plumbing business
Questions


1.   Describe, using Article 1, what is meant by contingency finance.                     (3)

2.   a) Calculate the costs variances X, Y and Z                                          (3)

     b) Are the variances Y and Z favourable or adverse? Explain your answer              (3)

     c) Why do you think the budgeted and actual cost figures for the Bouncy Castle
        are the same?                                                               (2)

     d) Suggest ONE reason to explain why the budgeted and actual cost figures for
        the Jewellery Enterprise and Krispy Kremes might have been different       (4)


3.   a) Calculate the net incomes A, B and C                                              (3)

     b) Calculate the net total income D                                                  (2)

     c) Why do you think the forecast and actual sales figures for the Bouncy Castle
        are the most similar, compared to the other two activities?
                                                                                          (4)

4.   Evaluate the likely value of sales forecasting to organisers of one-off events,
     such as a Children in Need charity day.                                              (8)


5.   Using Article 2, analyse TWO purposes to a small business of preparing a cash-flow
     forecast                                                                        (6)


6.   Identify and discuss TWO ways Gregor could have avoided cash-flow problems (12)


                                                                             TOTAL = 50 Marks

     Question         K/U         Application      Analysis     Evaluation       Totals
            1                 2              1              -                -             3
           2a                 -              3              -                -            12
           2b                 1              1              1                -             3
           2c                 1              1              -                -             2
           2d                 -              2              2                -             4
           3a                 -              3              -                -             9
           3b                 -              2              -                -             2
           3c                                2              2                              4
            4                 2              1              1                4             8
            5                 2              -              4                -             6
            6                 2              4              2                4            12
        TOTAL                10            20              12                8            50
Question    Question                                                            Marks
Number

1.          Describe, using Article 1, what is meant by contingency             3
            finance.

            Knowledge: A financial fallback fund (1) used to pay for
            unanticipated costs (1)                                             2

            Application: in this case an extra loan of up to £100 may have
            been provided (1)                                                   1



Calculations for 2a), 3a) and 3b)

Activity     Budgeted      Actual        Cost          Sales        Sales           Net
             costs £s      costs £s      variances     Forecast     Actual £s       Incomes £s
                                         £s            £s
Bouncy       100           100           0 (1)         200          220             120 (1)
Castle
Jewellery    30            40            +10 (1)       120          60              20 (1)
                                         (adverse)
Krispy Ks    80            160           +80 (1)       240          440             280 (1)
                                         (adverse)
                                                                    TOTAL Net       420 (1)
                                                                    Income

Question    Question
Number

2b.         Are the variances favourable or adverse?                                3
            Explain your answer

            Knowledge: both are adverse (1)                                         1

            Application: because they cost more than what was budgeted (1)          1

            Analysis: this will have a detrimental effect on net income, so is 1
            considered adverse (1)


Question    Question                                                                Mark
Number

2c.         Why do you think the budgeted and actual cost figures for the           2
            Bouncy Castle are the same?
            Knowledge 1, Application 1
                                                                                    1
            Knowledge: because the rental charge was fixed (1)

            Application: by the company who hired out the Bouncy Castle (1)         1
Question   Question                                                                  Marks
Number
                                                                                     (4)

2d         Suggest ONE reason to explain why the budgeted and actual cost
           figures for the Jewellery Enterprise AND Krispy Kremes might
           have been different

           Application – up to 2 marks, e.g. the materials needed to make
           the jewellery may have increased in either cost or in the quantity        2
           (1) /the students may have bought more KK from the suppliers (1)

           Analysis – up to 2 marks, e.g. compared to the costs or quantity
           expected (1) /as they noticed stocks of KK were running low (1)           2




Question   Question                                                                  Marks
Number
                                                                                     (4)

3c         Why do you think the forecast compared to actual sales figures
           for the Bouncy Castle are close, unlike the other two activities?

           Application – up to 2 marks, e.g. the organisers had forecast the         2
           number of year 7s likely to use the BC(1) /it was less easy to
           forecast the sales of doughnuts/jewellery (1)

           Analysis – up to 2 marks, e.g. this is because they could go off the      2
           registers or used a survey(1) /these purchases were unplanned(1)



Question   Question
Number

4          Evaluate the likely value of sales forecasting to organisers of one-off events, such
           as a Children in Need charity day (8 marks)
Level      Mark Descriptor

Level 1    1-2    Knowledge and understanding of sales forecasting, e.g. estimating
                  the future value of sales revenues

Level 2    3-4    Applies answer to case study, e.g. predicted how much people will
                  donate to charity/how many people will attend the event

Level 3    5-6    Analyses likely value of SF e.g. organisers can determine the
                  resources needed, including staff and materials

Level 4    7-8    Evaluates value of SF, e.g. but external factors, such as the weather
                  in this case, can cause sales to be very different to what was
                  anticipated, so the organisers may over or understock
5.       Two Purposes (6 marks):

        to help determine times when liquidity may be a problem (K1) in which case
         contingency finance such as an overdraft or loan can be arranged (A1) in which case
         money coming in will for a period of time finance outgoings (A2)
        to help seek external finance (1) such as a start-up loan so that the small business can
         open effectively(A1) or gain trade credit, so that the business can buy on credit and
         operate more effectively (A2)

6.       Identification and discussion of TWO ways for Gregor to avoid CF problems (12)

         Identification of two ways – collect payment in advance, seek cheaper materials (2)
         Applied to Gregor – so that he could continue to operate as a plumber, buy the
         van/tools/equipment/materials he needed to do his jobs (4)
         Analysed, e.g. so that consumers are not having to wait for Gregor to complete his
         jobs whilst he is waiting for money to pay for necessary materials (2)
         However, it is difficult to collect payment in advance because customers may not trust
         him to do a good job (think ‘Rogue Traders’) or if he purchases cheaper materials this
         may affect the quality of his workmanship (4)

								
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