Using Budgets

Using BudgetsAS Business Studies

Aims & ObjectivesAim:Understand variance analysisObjectives:Define variance analysisExplain the causes of varianceAnalyse managerial reactions to variance analysisEvaluate the usefulness of variance analysis

Starter Define a budget

Give 2 advantages to the business of using budgets

Give 2 disadvantages to the business of using budgets.

+ / - of Budgeting

Bobs Beer BudgetBobUniversity StudentBudgeted his first week at universityAfter his first month he realised that his actual amount spent was different

Bobs Beer BudgetItemBudgeted Cost Actual Cost Difference +/- Food5015Alcohol20112Fancy Dress2072Cleaning Products50Train Ticket Home3030Total125229

Bobs Beer BudgetItemBudgeted Cost Actual Cost Difference +/- Food5015 + 35Alcohol20112- 92Fancy Dress2072- 52Cleaning Products50+ 5Train Ticket Home3030 0Total125229-104

Bobs Beer BudgetBob blew his budget in the first week!

Variance AnalysisVariance: the difference between a budgeted figure and the actual figure achieved.

Variance Analysis: is the comparison by an organisation of its actual performance with its expected budgeted performance over a period of time.

Favourable VariancesFavourable Variances: A better result than expectedBudgeted figure is less (costs) or more (revenue) than expected.Leads to higher than expected profitsItemBudget Actual Variance Sales Revenue50,00060,00010,000 favourableFixed Costs15,00012,0003,000 favourableEvaluation:Favourable variances are not always good, as cheaper costs, may mean that quality of goods suffers as a result!

Adverse VariancesAdverse Variances:A worse than expected resultCosts higher or revenue lower than expectedShould lead to lower than expected profitsItemBudget Actual Variance Sales Revenue50,00040,00010,000 adverseFixed Costs15,00017,0002,000 adverse

WorksheetBudgetActualVarianceSales Revenue650,000645,000Fixed Costs46,00044,000Labour Costs230,000256,000Material Costs98,00094,000Profit276,000

What causes variances?In groups discuss what the main causes of favourable and adverse variances may be?

Favourable Variance Causes

Adverse Variance Causes

Decision MakingVariances affect decision making by managers.

Task: Identify the potential drawbacks of the following management reactions to adverse sales variances.

Adverse Sales Variance Reactions

Adverse Sales Variance Reactions

Adverse Cost Variance ReactionsTask: Identify the potential drawbacks of the following management reactions to adverse cost variances.

Adverse Cost Variance Reactions

Adverse Cost Variance Reactions

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