Budgeting

Budgeting
Week 8
Learning Outcomes
To define budget
To identify the importance of budgeting
To define variance and its various types
To calculate variance by reading financial statements
What is Budget?
A budget is a means of planning and control used by the management of a
company to achieve stated objectives
It is mainly set in financial terms, e.g. a sales revenue budget, a cost
budget, however it can also be expressed in terms of units, such as items
produced, items sold and number of employees.
Budgets can be income budgets for money received or expenditure ones for
money spent
Most budgets are prepared for the next financial year (the budget period)
and are usually divided into shorter time periods, such as four-weekly or
monthly. This is to maintain better control over the budget.
(Cox and Fardon, 2007)
What is Budget?
Using the provided template, identify as
many budgeted items as possible, while
in the category column, identify them as
income or expenditure
What is Budget?
Some examples of budgeted
items

AssignmentTutorOnline

Why Budget?
To control income and expenditure
To establish priorities and set targets in numerical terms
To provide direction and co-ordination, so that business objectives
can be turned into practical reality
To assign responsibilities to budget holders (such as managers) and
allocate resources
To communicate targets (such as from management to employees)
To motivate staff
To improve efficiency
To monitor performance
Importance of Budgeting
Let’s watch video;
https://www.youtube.com/watch?v=Zi_CXBJy41o
Key points from the video?
Some answers:
–Clear picture and record of incomes and expenses, including unnecessary
expenses.
–Making financial decisions better, to achieve long-term goals
–Making plans for savings (to improve/increase)
–Spend wisely, control spending/consumption
–Prepare for emergencies, getting out of debt
Variances
The budget, once it is set for the financial year, is monitored by comparing
budgeted figures with actual results. Any differences between the two are
called variances.
Significant variances will need to be investigated.
Variances in budgets need to be reported to the appropriate level of
management within the company. For example, less significant variances
are dealt with by the manager and supervisors, while more significant ones
need to be mentioned to a higher management level. At the same time,
many variances do not need reporting, such as the overspending on
stationery.
(Cox and Fardon, 2007)
Two types of variances
Practice on Variance Analysis – 1
33,500-29,200 = 4,300
adverse
Practice on Variance Analysis – 2
Practice on Variance Analysis – 2

favourable
Practice on Variance Analysis – 3
Produce variance analysis report on Gross and Net sales

Case Study
Operating statement for a company
Thank You
Any Questions?