Budgeting & Variance Analysis


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iGCSE Business

Remember - if it makes it more profitable it is positive, if it makes it less profitable it is ADVERSE!

Budgeting & Variance Analysis

  1. 1. Budgeting & Variance
  2. 2. Lesson Objectives What are budgets? How do businesses use budgets? - Variance Analysis How do businesses benefit from budgets? How are budgets produced?
  3. 3. Types of budgets Almostall activities of a business can be budgeted. These include:  Sales budget  Expenditure budget  Profit Budget
  4. 4. What is budgeting? Budgeting involves defining financial objectives, assessing finances and using this information for financial planning. Once the financial manager has an understanding of how the business stands financially he can set budgets.
  5. 5. Benefits of Budgeting It helps to predict what will happen in the future It sets targets They help monitor performance They help control performance They help in business planning They can be used as a source of motivation as they involve a consultation process They are a form of communication
  6. 6. Past, Present, Future
  7. 7. The process of budget setting The business is broken down into a series of control centres Each manager has responsibility for managing the budget for their control centre Each manager is kept informed of their own performance and that of other budget holders
  8. 8. How are the Budgets decided?Managers will look at: Past results & costs Planned Output How money has been allocated in the past Business Objectives for the coming period Consultation with managers Forecasts for markets and prices
  9. 9. Variance Analysis Variance analysis is Favourable variances mean used to calculate the that the actual performance difference between any of the organisation has been actual and budgeted better than expected – likely figures. to increase profit Adverse variances mean that After calculation the the actual performance has variance should be been worse than expected interpreted as follows: -likely to reduce profit
  10. 10. Profit Variance The difference between budgeted profit and actual profit This can be broken down to revenue variances and cost variances These variances can in turn be broken down further
  11. 11. Sales Variance Sales variance – the difference between actual sales revenue and budgeted sales revenueThis can be broken down into: - Sales volume variance (how sales differed from target) - Price variance (how actual price differed from expected price)
  12. 12. Cost Variances Material price variance – the difference between the budgeted cost of raw materials and the actual costs Material usage variance – the difference between the budgeted quantities of raw materials & supplies against the actual quantities used Labour rate variance – the budgeted wage bill compared to the actual wage bill Labour efficiency variance – the budgeted number of man-hours to complete tasks compared to the actual time taken