Budgets

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  • Created by: Bailey08
  • Created on: 08-03-15 16:09

Role of Budgets

A Budget - is a financial plan for the future concerning the revenues and costs of the business. 

Budgetory control - is the process by which financial control is exercised within an organisation 

  • Budgets for income/revenue expenditure are prepared and then compared with actual performance to look for variances. 
  • managers are responsible for controlling their costs within their budgets and are required to take action if excessive variances occur.

Uses of Budgets 

  • control income and expenditure 
  • set targets and establish priorities 
  • provide practical objectives 
  • asign responsibilities to budget holders and allocate resources 
  • communicate targets between employees 
  • motivate staff 
  • improve efficiency 
  • monitor performance 
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Principles for an effective budget system

  • Mangerial responsibilities clearly defined 
  • Individual budgets lay down a plan of action 
  • Performance always measured against the budget 
  • Action taken if dramatic variances occur
  • Budgets from different departments are only permitted after approvial from senior management 
  • All unaccounted for variances are measured 

Historical budgeting is when last years figures are used to set the budget 

Zero-based budgeting is when revenues are set at zero and budget is based on new proposals for sales and costs 

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Variances

A Variance - occurs when there is a difference between actual figures and budget figures. 

Either: 

  • Positive (favourable) - better than expected 
  • Negative (Adverse/unfavourable) - worse than expected

'management by exception' - is the name given to the process of focusing on activities that require attention and ignoring those that appear to be running smoothly. 

Variances highlight areas in a business that are not in line with its expected performance. 

  • Causes of favourable variance include costs lower than expected in the budget or sales revenue higher than expected.
  • Causes of adeverse variances include costs being higher than expected or sales revenue lower than expected. 
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Problems and limitations of using budgets

Limitations: 

  • Only as good as data used to create them. 
  • They can lead to inflexibility in decision making. 
  • Budgets have to be constantly changed as circumstances change.
  • Time consuming to make
  • Can result in short-term decisions to keep in the budget that affect the long-term budget.
  • Managers become to occupied in creating them 
  • Affect the motivation of staff 
  • Unrealistic targets add to de-motivation 
  • Cause battles over allocation of budgets 
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