Businesss

Obj1 : explain the benefits and potential drawbacks of using budgets

Obj2: calculate variances from budgeted figures

0bj3: interpret and understand what favourable and adverse variance mean

obj4: use variance analysis to make informed decision making.

What are budgets?

Key term budget: budgets are finical targets for the 1. future covering revenue (income) and 2. Expenditure over a certain time period.

Obj 1The benefits of using budgets

1. Controlling finances: expenditure budgets reduce the risk of over spending

• A budgetary system allows more money to be allocated to problem or underperforming departments or products

2. Improving staff performance.

• Many staff responds well to reasonable and agreed objectives to work towards too.

• Budgets can be a finical objective for a department to work towards too.

• Employees can gain satisfaction from meeting a budget

• Staff motivation may increase from being given responsibility to reach a budget, or being recognised as a responsible budget holder this can

The potential draw backs of using budgets:

• Budgets can cause resentment and rivalry if departments compete for money

• Budgets can become restrictive, fixed budgets stop firms responding to changing market condition

• Budgets can be too time consuming. Managers can get too preoccupied with setting and reviewing budgets and forget to focus on the real issues of winning business and understanding the market conditions.

• The motivation impact of budgets can be failed to be achieved

• If very ambitious targets are set and then considered basically unachievable. These budgets will be impossible to motivate the budget holder

Obj 3 Variance

Variance: the difference between the actual figure and the budgeted figure.

Variance analysis: is the comparison by an organisation of its actual performance with its expected budgeted performand3 over a certain time period.

The purpose of variances is to...