Btec Business Studies Unit 2 Assignment 4 Budgeting

Learning objectives Understand different types of costs Understand why it is important to manage costs Know what the term budget means Identify the purpose of budgeting Develop an understanding of the benefits and drawbacks of using budgets Know how to interpret variances between the budget forecast and the actual results

Costs A cost is They fall into 2 main categories Fixed Cost Variable costs Task – define these costs

Costs Fixed cost – Variable costs – Extension task – identify business costs that fall into the 2 types of costs and explain why they are fixed or variable costs

Mix and Match administration salaries Lighting & heating power vehicles Rent &rates Raw materials wages machinery marketing

Why is it important to manage costs? In pairs bullet point reasons why it is important To manage costs Prepare to feedback to the class

Budgeting What is a budget? An agreed plan establishing, in numerical Or financial terms, the policy to be pursued And the anticipated outcomes of that policy

Budget Allocation of money to a particular function / department They will include targets for revenue and output or sales volume Budget holders will try to exceed targets for revenue Cost budgets – the aim is to stay within the planned target

To encourage delegation The role of a budget To establish priority To ensure that a Business does not overspend To encourage delegation & responsibility To assign responsibility To improve efficiency

Problems of setting Budgets There may be unforeseen changes The level of inflation Is not easy to predict Managers may not know enough about the division or department Budgets maybe imposed Setting a budget can Be time consuming

Benefits of using Budgets They assess forecasting ability They provide direction & coordination They improve efficiency They motivate staff

Drawbacks of using budgets Changes may not be allowed for when a budget is reviewed They are difficult to monitor fairly Savings may be sought that are not in the interest of the firm Allocations may be incorrect

What is a good budget? The problems we have just looked at can be reduced by This allows amendments in response to changes in circumstances FLEXIBLE BUDGETING

A Good Budget A good budget should be Be consistent with the aims of the business Be based on the opinions of as many people as possible Set challenging but realistic targets Be monitored at regular intervals, allowing for changes in the business and its environment

Zero Budgeting A system of setting budgets where managers must justify all of the money allocated to them, In order to ensure that allocations are not excessive

It encourages budget holders to plan thoroughly and carefully It identifies changes in needs in an organisation. This avoids declining areas accumulating high budgets and possibly preventing the expansion of newer, more profitable areas of business It can save money by enabling the business to cut costs where managers are unable to justify their spending advantages

It can be very time consuming, as detailed planning is needed It can be very time consuming, as detailed planning is needed. The time spent on planning may cost more than the budget saving It may lead to high allocations for those managers who are skilled at presenting their case, rather than those who need the highest allocations. disadvantages

Interpreting Variances An important aspect of monitoring and reviewing the actual outcomes in comparison to the budgeted figure (the target). Differences between budgeted and actual figures are known as variances.

Interpreting variances Favourable variances When costs are lower than expected or revenue is higher than expected Negative (adverse) variances When costs are higher than expected or revenue is lower than expected.

Learning Outcomes To know what the term budget means Have identified the purpose of budgets To have developed an understanding of the drawbacks and benefits of using budgets Have created budgets and be able to interpret variances