AS Business Studies: Finance Using Budgets AS Business Studies: Finance

Lesson Aims You will understand:- How variances are calculated The ways in variances are used to analyse budgets How variances can be used by businesses in the process of decision making The benefits and drawbacks of using budgets

Monitoring Budgets Why? Analysing budgeted and actual expenditure Setting budgets is just the first stage. It is essential to monitor the accuracy of the financial plans against actual figures. Analysing budgeted and actual expenditure Is the business controlling its costs? Can different parts of the business manage expenditure against targets as the business grows? Profitability can be improved if problem areas of over spending are eradicated. This may be through action such as addressing motivation, quality and capacity issues.

Monitoring Budgets Analysing Sales Revenue Analysing Profit Budgets If the business fails to meet its revenue budget it needs to know why:- Are prices too high? Is the business advertising effectively? (targeting) What are competitors doing? Is the product quality/design suitable? Good managers will use this information to make decisions to improve performance. Analysing Profit Budgets Excess Expenditure Revenue falling short of expectations Combination of the above. What needs to be done?

Variance Analysis Definition Favourable Variance Adverse Variance “Variance analysis is the process of investigating any difference between forecast data and actual figures.” Favourable Variance Exists when the difference between the actual and budgeted figures will result in the business enjoying higher profits than shown in the budget. Adverse Variance Occurs when the difference between the figures in the budget and the actual figures will lead to the firm’s profits being lower than planned.

Examples Favourable Variance Adverse Variance Examples Causes

Examples Favourable Variance Adverse Variance Examples Causes Actual wages less than budgeted Budgeted sales revenue less lower than actual sales revenue Expenditure on fuel is less than budgeted figure Sales revenue below the budgeted figure Actual raw materials costs exceed figure planned in budget Overheads turn out to be higher than in budget Causes Wage rises lower than expected Economic boom leads to higher than expected sales Rising value of the pound makes imported raw materials cheaper Competitors introduce new products winning extra sales Government increases business rates by unexpected amount Fuel prices increase as price of oil increases

Calculating Variances Revenue/ Cost Budget Figure (£) Actual Figure (£) Variance (£) Sales Revenue 840,000 790,000 Fuel Costs 75,000 70,000 Raw Material Costs 245,000 265,000 Labour Costs 115,000 112,000

Calculating Variances Revenue/ Cost Budget Figure (£) Actual Figure (£) Variance (£) Sales Revenue 840,000 790,000 50,000 adverse Fuel Costs 75,000 70,000 5,000 favourable Raw Material Costs 245,000 265,000 20,0000 adverse Labour Costs 115,000 112,000 3,000 favourable

Examiner’s Advice Questions asking you to analyse variances are common in AS Business Studies examinations. It is important for you to identify those areas in which major differences between planned and actual expenditure or revenue have occurred. This will help you to give focus to your answer. It is also very likely that you will be asked to suggest possible causes (or cures) for the variances. Avoid simply describing the data you were given as this will result on few or no marks.

Responding to Adverse Variances

Responding to Adverse Variances

Responding to Adverse Variances

Responding to Adverse Variances

Delegated Budgets Reduce number of managers = cut wages Motivate employees by giving them more diverse and responsible jobs. Help encourage employees at all levels to play a part in decision making and problem solving.

Using Budgets Control finances effectively Do not over spend Control in the hands of appropriate parts of company Funds can be directed to important areas Motivate staff

Disadvantages of Budgets Training required for new budget holders Teething problems for new budget holders Allocating budgets fairly and in the best interests of the business can be tricky Budgets normally relate to the current financial year and may not take into account the more long term vision of the business.

Issues for Analysis and Evaluation Identify adverse and favourable variances and explain the possible causes of these variances Suggesting actions managers might take in response The advantages and disadvantages of using budgets Issues for Evaluation How valuable is variance analysis to a start up business? What extent do the results of variance analysis represent a problem for a business? Do the benefits of delegating budgets outweigh the disadvantages of doing so?

How did we get on? Can we understand:- how variances are calculated The ways in variances are used to analyse budgets How variances can be used by businesses in the process of decision making The benefits and drawbacks of using budgets