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.

Slide 2

• Variances
• Variances are the difference between the budgeted figures and the actual figures.
• Variance = Budgeted cost - Actual cost
• Variances 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.

Slide 3

• Responsible managers:
• Income:
• - Sales manager
• Materials:
• - Production manager
• - Purchasing manager
• Labour:
• - Production manager
• - Human resources manager
• Expenses:
• - Administration manager
• Production overheads:
• - Production manager
• Administration overheads:
• - Administration manager
• Selling and distribution manager:
• - Sales manager
• - Distribution/transport manager
• Financial overheads:
• - Finance manager
• - Company accountant