CH18 - Budgeting

• A budget is a financial plan of action that covers the period of time. It describes expected levels of expenditure and revenue
• The budgeting process -

  1. Establish the aims and objectives of the business
  2. Set main functional areas budgets such as production, marketing or financial budget
  3. Break budget down
  4. Monitor Budget
  5. Examine any differences
  6. Use previous years budget for next year
• Benefits of budgeting is that it can improve management control, it can improve communication systems and can motivate managers
• Problems with budgets is that :

  • Those excluded from the budgeting process might feel demotivated & excluded
  • The budgets need to be flexible to take external factors in consideration
  • Quality budgets rely on good quality information
• Zero budgeting is where managers start with a clean sheet.

  This will:

  • Improve control
  • reduces uneccessary costs
  • Motivates managers to look at alternative options
• Budgetary control is completed through a variance analysis. This can be favourable (F) or adverse (A)

  It is important that the budgets are monitored
• Favourible variance occurs when :

  • Expenditure is less than expected
  • Revenues are higher than expected
• Adverse variance occurs when :

  • Expenditure is higher than expected
  • Revenues are lower than expected
• Reasons for variance in sales:

  • Recession
  • Competitor brings out better product or price
  • Change in taste
  • Increased costs
• Reasons for varaince in cost of sales:

  • Exchange rate
  • Increased min Wage
  • Bulk buying
  • Improved production method