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
