AS_Budgeting

Lesson Objectives: What is budgeting? Know how budgets provide financial targets Describe the main budgets that apply to their selected business Analysing the variances between budget and actual production, costs, and sales Evaluate and react to variances in your actuals compared to your budget.

What is a Budget? A budget is a financial plan for the future operations of the business. Budgets are used to set targets, to monitor performance and control operations. Shows how much money a business plans to spend or receive in a future time period. Budgets are usually produced every 6 or 12 months, and monitored monthly.

The Main Types of Budget Sales – (What a business sells determines how much it needs to produce. Sales are the main areas of generating cash inflows. Sales budgets are affected by consumer tastes) Production – (A production budget sets out how many units need to be made. Too few customers? Too many goods?) Purchases and Labour – (Once a business decides how much it needs to produce, they need to make sure they have enough raw materials, components and employees.

Congratulations!

Your Task Prepare a budget for a wedding. List all the things you think would be essential and the likely costs. You cannot exceed _______ Dhs.

Rings Suit – groom & best man Honeymoon Hair and make up Cake Dress – bride and bridesmaids Photos Reception Page Boy & flower girl Wedding Planner Food Stag & hen nights Night venue Church Balloons Car Entertainment Rings Gifts Jewellery Flowers Champagne

Types of Variances Favourable – occurs when results are better than expected. ◦ Actual revenue > budgeted ◦ Actual costs < budgeted Adverse – occurs when results are worse than expected. ◦ Actual revenue < budgeted ◦ Actual costs > budgeted

Analyse variance 10 VariableBudgetActualVariance Sales20,00022,3922,392 Favourable Purchases Adverse Labour3,5003, Adverse Capital Expenditure 1, Favourable

ACTIVITY (done AS) Revenue/costBudgeted (£) Actual (£)Variance Sales Revenue840,000790,000 COSTS: Fuel costs75,00070,000 Raw materials245,000265,000 Labour costs115,000112,000 TOTAL COSTS435,000447,000 PROFIT405,000343,000

Why is this done? To pinpoint and highlight areas of good or bad performance.

Why do Variances Occur? You must be able to give reasons as to why variances occur Working in pairs, identify some examples why: ◦ Favourable variances might occur ◦ Adverse variances might occur

My Examples: Why Do Favourable Variances Occur? Lower interest rates = higher than expected sales increase Bad publicity for competitor’s products boost sales above target levels Unions agree to a wage settlement below the rate of inflation that was budgeted for Higher £ exchange rate = imported goods cheaper than forecast

Examples: Why Do Adverse Variances Occur? Competitors offer special price deals that lead to lower sales for us Staff efficiency falls = higher wage cost for each unit Oil price increase raises energy costs Rent increases forced through are higher than expected

From Theme 2, Page 35

ICT Task Theme 2 Page 36 Question: Windemere lake Cruises Evaluate question. Remember these questions require you to make a final conclusion or judgement.