2.2.4 budgets Flashcards
budget
a financial plan for the future concerning the revenues and costs of a business
process of budgets
revenue and costs budgets are prepared in advance then compared with actual performance
uses of budgets
motivate staff
improve efficiency
allocate resources
communicate targets
purpose of budgets
managers must think ahead
prevents spending an unlimited amount of money
why would a business set a budget
planning
motivation
decisions
control
effective budgeting
managerial responsibilities are clearly defined
managers have responsibility
performance is monitored
two main approaches to budgeting
historical
zero-based
historical budgets
uses last years figures as the basis for the budget.
based on actual results.
disadvantages of historical budgets
dynamic business environment - circumstances change
does not encourage efficiency
zero-based budgets
budgeted costs and revenues are set to zero.
budget is based on new proposals for sales and costs.
disadvantages of zero-based budgets
makes budgeting more complicated and time-consuming
may be used in a start-up with no historical data
three main budgets
revenue budget
cost budget
profit budget
cost budget
expected cots based on sales budget
overheads and other fixed costs
revenue budget
expected revenues and sales
broken down into more detail
profit budget
based on the combined sales and cost budgets
may form basis for performance bonuses
variance analysis
calculating and investigating the differences between actual results and the budget
two types of variance
favourable variance
adverse variance
favourable variance
actual figures are better than budgeted figure
e.g. lower costs, higher revenue/profits
adverse variance
actual figure worse than budgeted figure
e.g. higher costs, lower revenue/profits
causes of favourable variances
stronger market demand than expected = higher actual revenue.
selling prices increased higher than budget.
competitor weakness = higher sales
causes of adverse variances
unexpected costs = unbudgeted costs.
over spends by budget holders.
market conditions = selling prices are lower than budget
what do variances depend on
was the variance foreseen?
size e.g. money and percentage terms.
cause.
difficulties of budgeting
tendency for managers to spend up to limit.
can cause inter-department rivalry.
difficult to plan ahead in some industries