What is a budget?
A budget is an agreed plan establishing in numerical or financial terms the policy to be pursued and the anticipated outcomes of that policy.
Budgets are usually stated in terms of financial targets, relating to money allocated to support the organisation of a particular function. They also include targets for revenue and output or sales volume.
There are three types of budgets
· Income budget –this show the agreed planned income of a business or division of a business over a period of time. It may also be described as a revenue budget or sales budget.
· Expenditure budget- this shows the agreed planned expenditure of a business or division of a business over a period of time.
· Profit budget – this shows the agreed, planned profit of a business or division over a period of time.
Benefits of using budgets
Drawbacks of using budgets
To provide direction and co ordination by ensuring that spending is geared towards the firms aims
If budgets are too ridged things could go wrong
To assign responsibility for the success or failure
Incorrect allocations a budget that is too generous may encourage inefficiency.
To motivate staff and set targets
A budget that is insufficient could demotivate staff
To improve efficiency by investigating reasons for failure and success
Poor communication could lead to non compliance
To encourage forward planning by studying possible outcomes
To establish priorities
What is budget control
Budgetary control is the establishment of the budget and the continuous comparison of actual and budgeted results in order to ascertain variances from the plan and to provide a basis for he revision of the objective or strategy.
This represents the difference between the planned standard and the actual performance. If the variance shows a poor performance is known as an adverse or unfavourable variance. If it does better it is known as a favourable variance.
Interpretations of variances
Interpretations of variances
Identity of budget
Cost of sales
Rent and rates
Account for the other variances to the planned budgets shown I the budget table above, indicating apparent areas of efficiency and inefficiency what reason could there be for a £2000 adverse variance for materials.
Analysis may also take the form of showing the :
Implications of budget variances
Benefits of budgeting to the firm
Difficulties and problems of budgeting.
· Identify the key cause of variances
· Assess the best solutions to adverse variances
· Judge the usefulness of budgeting, the difficulties of projecting and so on
· Evaluate the pro and cons of profit centre and cost centres
· Discuss the feasibility of solving problems
Budgets imply CONTROL.
A MAJOR LIMITATION OF BUDGETS IS THE TIMEING. BUDGETS ARE SET BEFORE THE EVENT ANS SO PEOPLE ARE GUESSING WHAT WILL HAVPPEN INA THE FUTURE. VARIANCES ARE ASSESSED AFTER THE EVENT BY WHICH TIME THE PROBLEMS HAVE PASSED.