budgets

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  • Budgets
    • 3 types
      • Analysing profit budgets:
        • profits below budget can be a cause for concern
        • can be cause by excess expenditure
        • could be that the business isnt reaching revenue targets
      • Analysing budgeted and actual expendtiture
        • Informs how successful the business is at controlling costs
        • If one area of the business is constantly overspending then the managaer might want to take action but possibly setting lower budgets
        • But if the budget fails to meet its budgets regularly it may be because the budgets are too low to be achieved
      • Analysing sales revenue.
        • If a business fails to meet it's sales target they might want to check why.
        • Prices may be too high
        • not targeting the correct market segment
        • not advertising sufficiently
    • Variance Analysis
      • occurs when an actual figure for sales and expenditure differs from budgeted
      • way of monitoring budgets
      • 2 types
        • Adverse
          • When the difference between the figures: budgeted and actual figures will lead the firms profit being lower than planned.
          • examples
            • budgeted sales higher than sales revenue
            • raw materials exceeding budgeted figure
            • overheads turned out to be higher than budgeted
            • Sales revenue below budgeted firgure
          • Adverse variance causes
            • Government increases business rates by unexpected amount
            • fuel prices increase as price of oil rises
            • competitors introduce new products winning extra sales
        • Favourable
          • Differences between budgeted and actual figures result in higher profits for the business
          • Example
            • expenses on fuel less than budget
            • Actual wages less than budgeted
    • Adverse sales revenue - sales revenue less than planned
      • product range update or extend as apporpriate
      • seek new markets - at home or overseas
      • improve company image - PR donaltions to charities
      • increase advertising and/or promotions
      • cut wages or increase productivity- increase amount produced per wroker per hour
      • cut prices- if consumer demand is sensitive to price changes
    • Adverse production (cost) variance - expenditure higher than planned
      • seek cheaper raw materials - purchasein bulk or overseas.
      • reduce waste- use fewer raw material and produce fewer faulty goods

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