Budgeting Flashcards
(12 cards)
Explain budgeting
A budget is a financial plan for the future; without such a plan, businesses and individuals often get into financial trouble.
* Sales revenue budgets set out a business’ planned revenue from selling its products. Important information includes expected level of sales and the likely selling
price of the product.
* Expenditure budgets set out a business’ planned expenditure on labour, raw materials, fuel and other items essential for production.
Pros of budgeting
- A means of controlling income and expenditure.
- Regulate the spending of money and highlight losses, waste and inefficiency.
- They act as a review and allow time for corrective action to take place.
- They allow delegation without loss of control – subordinates can be set their own targets.
- They help in the co-ordination of a business and improve communication between different sections of the business.
- Budgets provide clear targets to be met and should help employees to focus on costs.
- Can act as a motivator for staff if budget is met.
Cons of budgeting
- They can be time consuming for managers in small businesses; especially for those who are not particularly numerate.
- Some personnel can resent having to meet budget targets that they have had no part in constructing. Poor motivation and missed targets can result.
- If the actual figures are very different from the budgeted ones the budget can lose its significance.
- The budget must not be too inflexible as business opportunities might be missed.
- Poorly constructed budgets can lead to poor decision making.
Explain zero budgets
It involves managers starting with a clean sheet where they must justify all expenditure. This does the following:
* improves control
* helps with allocation of resources
* limits the tendency for budgets to increase annually with no real justification for the increase
* reduces unnecessary costs
* motivates managers to look at alternative options
Define budgetary control variances
A variance is any unplanned change from the budgeted figure. They occur when an actual figure for sales or expenditure differs from the budgeted figure.
Variances can be favourable (F) or adverse (A)
Explain a favourable variance
- A favourable variance exists when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the
budget. For example, when:
– expenditure is less than expected
– revenues are higher than expected.
Explain an adverse variance
- An adverse variance occurs when the difference between the figures in the budget and the actual figures will lead to the business’ profits being lower than planned. For example, when:
– expenditure is higher than expected
– revenues are lower than expected.
Reasons for changes in budget variances
- economy is in a recession, so people are spending less
- a competitor brought out a new product
- raw material costs may have fallen
- new/cheaper suppliers may have been found
- employees may have been better trained/motivated
- fewer employees may have been employed to produce the same output.
Favourable sales variances might be caused by
- an effective bonus scheme for salesmen
- a successful advertising campaign
- favourable weather
- the demise of a competitor.
Adverse sales variances might be caused by
- the successful activities of competitors
- they may have lost an important contract
- ineffective advertising
- logistical problems that meant that stock did not arrive with the customer on time
- bad weather
- general economic conditions (recession)
- changes in consumer tastes
Favourable cost variances might have been caused by
- employees may have been better trained/motivated leading to improved labour productivity
- reduced costs of imported components due to a strengthening of Sterling
- raw material costs may have fallen.
Adverse cost variances might have been caused by
- a strike by employees
- bad weather in the growing region for crops such as sugar or coffee
- a devaluation of Sterling
- unexpected price rises from suppliers
