Budgets

A budget is a financial plan for the future concerning revenues and costs of the business. It is an agred plan of action over a specific period of time.

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  • Created by: Soph
  • Created on: 26-05-14 13:18

Budgets

A budget is a financial plan for the future concerning the costs and revenues of a business. It contains an agreed plan of action over a given period of time.

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Budgetary Control

The process by which financial control is exercised within an organisation.

Budgets for income/revenue and expenditure are prepared in advance and then compared with actual perfomance to establish variances.

Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances are regarded as excessive.

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Use of Budgets

  • Establish priorities and set targets
  • Assign responsibilities
  • Allocate resources
  • Delegate without loss of control
  • Monitor income and expenditure as well as performance
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Good budgetary control includes..

  • Clearly defined managerial responsibilites
  • Unaccounted for variances are investigated
  • Action is taken if results differ significantly from the budget
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Approaches to budgeting:

  • Historical Budgeting:

Using previous years figures for the basis of the new budget. Realistic as based on real data, however, circumstances may have changed and so these figures may be unreliable.

  • Zero Budgeting

Budgeted costs and revenues are set to zero. budget is based on new proposals of sales and costs. This makes budgeting more complicated and time consuming but potentially more realisitic.

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Management by exception

Focusing on activities that require attention

Budget control and analysis of variance facilitates management by exception since it highlights areas of the business which deviate predetermined standards.

Items of income or spending that show no or small variance require no action, concentrate on large adverse variances.

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Variance

Variances arise when there is a difference between bugeted costs and revenues and actual performance.

They can be favourable or adverse

Matter more depending on size, cause and long term

Act only if the variance is outside agreed margin and investigate significant variance.

REMEMBER:

Adverse variance can be as a result of something good, e.g. higher production costs due to increased sales.

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Problems of Budgets

  • Only as good as data used
  • Can lead to inflexibility
  • Need to be changed with circumstances
  • Time consuming
  • Can result in short term decisions to keep within budget rather than the appropriate long term one.
  • Can be demotivation-through forced rather than negotiations, and if budget is unrealistic
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