using budgets

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Unit 2 ­ Managing a business
Finance Revision notes
What You Need To Know For This Topic:
Understand the features, benefits & drawbacks of budgeting
Be able to use variance analysis formula to explain whether adverse or
Page | 1
favourable variance.
Interpret findings of variance analysis
Budget: An agreed plan establishing, in numerical or financial
terms, the policy to be pursued and the anticipated outcomes
of that policy.
Benefits of using budgets Drawbacks of using budgets
They provide direction and They are difficult to monitor fairly
They motivate staff Allocations maybe incorrect
They improve efficiency Savings maybe sought that are
not in
the interests of the firm
They assess forecasting ability Changes may not be allowed for
a budget is reviewed
Features Of Good Budgeting
Be consistent with the aims of the business
Be based on the opinions of as many people as possible
Set challenging but realistic targets
Be monitored at regular intervals, allowing for changes in the business &
its environment
Be flexible
Variance analysis: The outcomes of budget examined against the
budgeted figures. The reasons for any differences (variances) are then
Favourable variance shows... Adverse (unfavourable) variance shows...
Actual revenue is greater Actual revenue is less than budgeted
than budgeted revenue revenue
Actual costs below budgeted Actual costs above budgeted costs

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Unit 2 ­ Managing a business
Finance Revision notes
Using variance analysis to inform decision making
An adverse variance may not be managers fault, maybe due to
unrealistic budget as a result inefficiencies shown in business and
mistakes made, unpredictable external factor e.g. changes in the market,
Page | 2 difficult for firms to meet targets
Favourable variance might show efficiency in operating and setting
good targets and the external factors e.g.…read more


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