2. THE TIMES 100
What is a budget?What is a budget?
A budget is a forward financial plan.
Budgets can be drawn up for:
Income
Expenditure
Profit
Cash flow
Output
3. THE TIMES 100
An expenditure budgetAn expenditure budget
£ thousand January February March
Salaries 230 250 250
Utilities 38 36 35
Rent 180 180 180
Administration 29 29 35
Depreciation 41 44 46
Total
expenditure 518 539 546
4. THE TIMES 100
Benefits of budgetingBenefits of budgeting
The use of budgets can:
Provide a framework for allocating and
utilising resources
Aid control and monitoring
Encourage managers to plan ahead
Provide targets which can be motivating
Improve efficiency
Allow better co-ordination of different
departments in an organisation
5. THE TIMES 100
Problems with budgetingProblems with budgeting
Predicting the future is not easy because of
external factors
A lack of historical data makes budget setting for
new businesses difficult
Budgets may be de-motivating if:
◦ workers have no input in budget setting
◦ they are too difficult to achieve
Managers may make decisions based on the
achievement of short term budgets rather than
the long term benefits to stakeholders
Budgets may cause conflict between managers
6. THE TIMES 100
The process of setting budgetsThe process of setting budgets
Draw up sales budgets taking into account
the firm’s objectives and any market
research carried out
Create expenditure budgets based on the
costs necessary to create the budgeted
sales
Use the sales and expenditure budgets to
set profit targets
7. THE TIMES 100
Variance analysisVariance analysis
Variance analysis compares actual
performance of an organisation with its
budgeted performance.
Variances can be:
Favourable (sales or profit are greater
than expected or costs are lower)
Adverse (sales or profit are lower than
expected or costs are higher)
8. THE TIMES 100
An example of variance analysisAn example of variance analysis
£ thousand Budget Actual Variance A/F
Salaries 230 232 2 A
Utilities 38 41 3 A
Rent 180 174 6 F
Administration 29 30 1 A
Depreciation 41 40 1 F
Total
expenditure 518 517 1 F
10. THE TIMES 100
Setting budgets at DavisSetting budgets at Davis
When setting budgets, Davis managers
have to consider different scenarios that
could face the organisation over the
coming financial year. Give examples of
the questions they are likely to ask.
Use the Davis case study to help you
11. THE TIMES 100
VariancesVariances
£m January February
Budget Actual Variance
A/F
Budget Actual Variance
A/F
Sales
6.4 6.9 ? 7.2 6.9 ?
Costs
3.8 3.7 ? 4.2 4.4 ?
Profit
? ? ? ? ? ?
Calculate the missing figures below
12. THE TIMES 100
Adverse variancesAdverse variances
Investigations into adverse variances
should be carried out. Use the case study
to identify what might cause adverse
variances.
13. THE TIMES 100
Drawbacks of budgetingDrawbacks of budgeting
The Davis case study states ‘staff time
devoted to budgets carries a real
opportunity cost’
Using an example from the case study,
explain what opportunity cost means.
14. THE TIMES 100
Useful resourcesUseful resources
Budgeting lesson suggestions and
activities (The Times 100)
Davis Service Group case study (The
Times 100)
Davis Service Group website
Editor's Notes
Examples include:
What is the overall economic trend for the UK and Europe?
What is the likely strategy of key competitors?
How are customer needs likely to change?
Is the company recruiting sufficient staff?
What is happening in the supplier markets?
Adverse variances may suggest:
Unrealistic budgeting
A failure with part of the process
A change in the external environment
Opportunity cost is the cost of making a choice i.e. The cost of the next best alternative use of a resource. In Davis, 750 people are involved in budgeting. While they are doing this they are not able to carry out their other responsibilities.
