Chapter 6

Chapter 6: Budgets and variances

What is a budget?A budget is a financial plan for an organisation that is prepared in advance. What are the purposes of a budget? The budget creates plans The budget communicates and coordinates the plans The budget can be used to monitor and control Standard costs - Expected costs that have been calculated in advance. 

VariancesVariances are the difference between the budgeted figures and the actual figures. Variance = Budgeted cost - Actual costVariances can either be: Adverse  Favourable Adverse - Where the actual cost is greater than the budgeted cost.Favourable - Where the actual cost is less than the budgeted cost. Significant variance - A variance that is brought to the managers attention for further investigation. 

Responsible managers:Income:- Sales managerMaterials:- Production manager- Purchasing managerLabour:- Production manager- Human resources managerExpenses:- Administration managerProduction overheads:- Production managerAdministration overheads:- Administration managerSelling and distribution manager:- Sales manager- Distribution/transport managerFinancial overheads:- Finance manager- Company accountant