Budgets And Variances Flashcards
What is budgeting?
A detailed plan for the future concerning the revenues and costs expected over a certain period of time
What is budgetary control?
The process by which financial control is exercised within an org
Why do managers use budgets?
- control income and expenditure
- motivate saf
- est priorities + set targets in numerical terms
- provide direction and co-ordination - objectives turned into reality
- assign responsibilities to budget holders
What are the principles for good budgetary control?
- individual budgets lay down a plan of action
- performance monitored agaisnt budget
- departures from budgets are permitted only after approval from senior management
- variances investigated
What is variance?
Involves calculating and investigating the differences between actual results and the budget
What are the two types of variances?
- positive/ favourable (better than expected)
- adverse/ unfavourable (worse than expected)
Why are the possible causes of favourable variance?
- stronger demand than expected = higher actual revenue
- better than expected productivity or efficiency
What are the possible causes for adverse variance?
- over-spends by budget holders
- sales forecast over-optimistic
- inefficiency in producing leading to inc waste
What is zero budgeting?
- alternative to traditional
- all budgets set to zero - managers justify reasons for funds
- helps prevent situation where same money given every year
What are flexible budgets?
Allow a business to make allowances for changes in the level of sales (adverse variances avoided)
What are the advanatges of variance analysis?
- way of measuring performance
- sets a target - eg revenue to beat
- identify variances + investigate
- est priorities
- allows to spot trends
- cant control expenses
What are the drawbacks of variance analysis?
- identifies but doesn’t exp variance
- only a forecast - not 100% accurate
- doesnt allow for flexibility eg changes in market
- doesnt allow for external factors
