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AS Budgets

as business

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4 views

AS Budgets

as business

Uploaded by

wijdan.ali7869
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Budgets

Budgeting: involves planing income and spending for speci c time period

Why Financial Planning Important


• without it, business will have no direction
• A business will struggle to allocate resources
• could demotivate employees, since they don’t have any target to work towards
• unable to measure progress, by measuring plans against the actual output

Bene ts Drawbacks

• Allocating Resources E ectively — budgeting • Lack of exibility — in case of sudden or


ensures proper allocation of resources — unexpected changes in the environment, if budgets
avoiding overspending were set with no exibility, this could be be
demotivating for budget holders trying to reach the
• Setting Targets — having realistic targets would targets

motivate better performance


• Focused on short term — around 12 months —

• Measuring & Assessing Performance — after managers may take short term decisions in order to

budgeted period — variance analysis helps stick to the plan however those short term decisions

mangers compare actual performance with the may not be good for business in the long run

budget plan — helping to identify where business


needs to improve on • Could lead to unnecessary spending — in case by
the end of the budgeting period, if funds are

• Ensures Controlling & Monitoring Of The underspent, manager might spend those funds in

Businesses — once the targets are set, order to cope up with the budget plan

managers will now do regular checks ensuring


regular monitoring of the business • Budgets for new projects — if project is innovate or
rst time in the market, the planning could be di cult

• Causes business to PLAN — leads to managers & inaccurate, for e.g. international space station,

setting targets to make sure plan is followed — super-fast train line

sense of direction given


Incremental Budgeting:
• involves using last year’s budget as a base and adjusting it for current year based on market conditions
• changes depend on conditions like in ation, expected output changes
Limitations
• each department only has to justify the increment and not the budget for the whole year — this causes the
budget to be in exible as unexpected circumstances are not considered

Zero Based Budgeting:


• requires all budget holders/departments to justify their budget each year
• exible, since unexpected circumstances are also considered
• di erent budgets levels each year
Limitations
• time consuming, each department has to devise new plan every year

Flexible Budgeting:
• involves setting new budgets depending on the actual revenue level achieved
• adverse variance (more costs then expected) increases the next budgets
• favourable variance (less costs then expected) decreases the next budget

• exible budget targets are more realistic


• budget holders / managers aren’t held accountable for adverse variance — since the budget is adjusted
accordingly
• easier to produce valid variance analysis

Variance: Di erence between actual budgeted and actual gures at the end of the budget period

Importance
• help set more realistic budgets in the future
• measures di erences from planned performance
• facilitates better business decisions by understand the reason of variances

• Variance can be favourable (increased pro t) & unfavourable (decreased pro t)

Causes For Adverse Variances:


• less units sold
• increased competition causing the lower down the price
• cost of raw materials higher than planned
• labour costs are above budget — wages rate increased — due to shortage of labour — or labours took
more time to complete the production
• overhead costs ( xed costs) — higher than expected — annual rent increased etc
Causes For Favourable Variances:
• economic growth
• competitor closing down — causing selling price to increase
• cost of raw materials lower than planned
• labour costs are lower than budget — wages rate decreased — due to shortage of labour — quicker
completion of work
• overhead costs ( xed costs) — lower than expected — interest rate decreased

Budget Conclusion

• Therefore in order to achieve e ective budgeting — coordination between departments is essential when
establishing the budgets
• budget should not be treated like forecast (prediction) — but instead its a plan that business should aim to ful l
• planning a budget can also be e ective — when managers responsible for meeting targets are also involved in
the budget setting — sense of ownership motivate the managers
• Budget serves as a tool for reviewing performance and ltering out unsuccessful & successful aspects of the
business where budget plan was used
• Therefore, budget should be set for any aspect of the business as long as its outcome is measurable — cost
centres — pro t centres

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