2.2.4 VARIANCE ANALYSIS / BUDGETING Flashcards
what’s a budget
a financial pan that is agreed in advance, its a plan not a forecast
what are the two types of budgets
1) revenues and earnings budget (in)
2) expenditure budgets (out)
what’s a historical budget
tracks past expenditures and revenues to analyse financial performance and inform future financial decisions
advantages of historical budgets
- helps asses performance evaluation
- enables trading of financial trends
-guides strategic decision making - promotes accountability
disadvantages of historical budgets
- may not account for unexpected events
- may not accurately predict
- may hinder innovation
- overemphasis on tradition
- time consuming
what’s a zero based budget
starts fresh each budget cycle, requiring all expenses to be justified from scratch
advantages of zero based budgets
- promotes cost efficiency
- resources are allocated based on current needs and priorities
- aligns decisions with strategic objectives
- enhances transparency and accountability
- allows flexibility
whats adverse variance
occurs when actual costs or revenues exceeded budgeted amounts, indicating a negative difference
whats favourable variance
happens when actual costs or revenues are lower than budgeted, indicating a positive difference
whats gross profit
difference between revenue and the cost of goods sold
how to calculate gross profit
revenue - cost of sales
whats net profit
final profit a company earns after deducting all expenses from its total revenue
how to calculate net profit
operating profit - interest
whats operating profit
profit a company earns from its main business activities after deducting operating expenses
how to calculate operating profit
gross profit - operating expenses
what is the new name for a loss and profit account
statement of comprehensive income
whats the SOCI used for
to calculate profitability ratios such as gross profit margins, operating profit margins and return on capital employed
formula for gross profit margin
(gross profit / revenue) x100
formula for net profit margin
(net profit before tax / revenue) x100
formula for operating profit margin
(operating profit / revenue) x100
businesses should compare profitability with
- industry benchmarks
- competitors
- historical performance
why is it important to measure profitability
- decision making
- investor confidence
- strategic planning
- performance evaluation
