Budgets

Budgets

1. Budget: an agreed plan establishing in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy

2. Provides Direction & Coordination, Motivates Staff, Improves Efficiency, and Assesses the Forecasting Abilities

3. Difficult of Monitor Fairly, Allocations may be Incorrect, Saving may be sought that are not in the interests of the firm (i.e. to keep within the budgets, a buyer may buy cheaper materials and thus lower the quality of the product), Changes may not be allowed for when the budget is reviewed (i.e. External factors outside the control of the org may affect budget holders' ability to keep thier plan)

4. Variance Analysis: the process by which the outcomes of budgets are examined and then compared w/ the budgeted figs. The reasons for any differences (variances) are then found

5. Favourable Variance: when costs are lower than expected or revenue is higher than expected/

6. Adverse Variance: when costs are higher than expected or revenue is lower than expected

7. Calculating Variances: Variance = Budget Figure - Actual Figure

8. After calculating variances, the budgets holder will interpret their meaning.

   • Adverse Variance may show inefficiency where the business has made mistakes. May also be due to external influences such as changes in the market, which made it more difficult for a firm to meet its target
   • Favourable Variances may show efficiency, indicating that the business has operated well. Also may show the external influences such as the state of the econ that made it easier for a firm to meet its targets