Budgeting
-A budget is a target for costs and sales
-A firm will always want to exceed the sales target / budget but keep within or below its budgeted costs
-A firm will always want to exceed the sales target / budget but keep within or below its budgeted costs
Budget example
-Variance
analysis or budgetary control refers to comparison of a firms actuals ( what
sales were achieved or what costs incurred ) to the budget
-Favourable variances means the company has done better than budgeted e.g. if actual sales were £4m or material costs were only £0.75m
-Adverse variance mean that the company has done worse than expected e.g. Sales were £2m or labour spent £1.5m.
L3 Uses of Budgetary Control / Variance Analysis
-Gives a firm or department a target to work towards-Motivates staff to achieve their sales budgets or find ways to keep costs within budget
-Makes someone accountable / responsible for the spend within a business area
-Useful to compare sales and costs of different outlets / stores/departments
L4 Limitations of budgetary control
-Can demotivate staff if budgets set are not achievable
-Quality can suffer if budgets are too low and departments cut corners
-Sometimes not appropriate to compare different the budgets of different stores due to differing locations etc.
Conclusion
It is necessary for firms to monitor costs to ensure they don’t overspend / lose profits but the targets set must be achievable
-Favourable variances means the company has done better than budgeted e.g. if actual sales were £4m or material costs were only £0.75m
-Adverse variance mean that the company has done worse than expected e.g. Sales were £2m or labour spent £1.5m.
L3 Uses of Budgetary Control / Variance Analysis
-Gives a firm or department a target to work towards-Motivates staff to achieve their sales budgets or find ways to keep costs within budget
-Makes someone accountable / responsible for the spend within a business area
-Useful to compare sales and costs of different outlets / stores/departments
L4 Limitations of budgetary control
-Can demotivate staff if budgets set are not achievable
-Quality can suffer if budgets are too low and departments cut corners
-Sometimes not appropriate to compare different the budgets of different stores due to differing locations etc.
Conclusion
It is necessary for firms to monitor costs to ensure they don’t overspend / lose profits but the targets set must be achievable