1. Exam Style Starter Just Juice
They had yet to reach their break-even level of sales and over the first ten weeks of trading, Just Juice Ltd had only attracted an average of 350 customers per week.
Use the information in the text and Table 1 to calculate Just Juice Ltds total profit or loss over its first ten weeks of trading. (6 marks)

2. Exam Style Starter

3. Budgeting Using and setting budgets
Sunday, 13 May 2018
Budgeting Using and setting budgets
Objectives;
Understand and discuss the reasons for businesses in setting budgets as a planning tool
Discuss the limitations of setting budgets including the need for awareness of flexibility

4. Picture the scene… It’s a Friday night in the run-up to Christmas
Picture the scene… It’s a Friday night in the run-up to Christmas. You and some friends are going out in the metropolis that is Beaconsfield. As you stand at the cash machine, trying not to step in the strange puddle in front of it you begin to think how much you will need, knowing full well that the machine may well be empty later on… So how much do you take out?

5. Budgets, what are they? “A budget is a financial plan for the future”
Types of budget;
Sales (income) Budget: expected sales over a given period of time in terms of both sales quantity (units) and sales value (£)
Expenditure Budget: expected costs (fixed, variable and semi-variable) over a period
Profit (loss) Budget: the anticipated difference between sales and expenditure
An increase in the sales budget will mean that the expenditure is also likely to rise (and vice versa)

6. What is your budget?
To build a clearer picture of budgets, you are going to produce your own personal budget for the rest of October;
What ‘income’ are you going to receive over the next three weeks? (consider birthday gifts as well as any earnings)
What ‘expenses’ do you need to cover? (presents, socialising, day-to-day expenses?)
Now you can work out your ‘Profit/Loss’ at the end of the month – will you be broke or better off??!

7. The Process of Creating Budgets
Research
Analysing and identifying market trends (Sales)
Identifying supplier charges for materials, labour and other external costs
Consider inflation and wage rate changes
Sales budget (expected revenue) which enables production levels and thus…
Expenditure budget, therefore
Profit budget

8. What does a budget look like?
Sales budget
Expenditure budget
Profit budget

9. Budgets – a net benefit or not?
Budgets can take a lot of resources to produce, including time and money. Use the resources available to you including your knowledge and thoughts to build up a case either in favour or against the use of budgets.

10. Benefits of budgeting
It indicates priorities. (which area of the organisation gets the largest piece of the budget pie?)
It provides direction and co-ordination, guaranteeing that spending is matched to the aims of the business
It assigns responsibility – the budget holder is responsible for success or failure
It can act as a motivator (Herzberg) being given the responsibility
It should improve efficiency, only what is needed is allocated and the difference between actual and budget can be analyses

11. Drawbacks of budgeting
If the budget system is too rigid, certain undesirable consequences can occur…
Incorrect allocations – too much may encourage inefficiency, too little may limit the businesses growth and activity
External factors – changes outside of the organisation may affect the budget holders ability to keep to a plan
Poor communication – an imposed budget may not recognise the needs of an area of the business leading to poor morale and resentment

12. Budgets – a recap of…
On a piece of paper, write down all that you know (and can remember) about budgets.

13. Variance Analysis
“A variance is the difference between budgeted and actual performance”
“Variance analysis is the process of analysing the reasons why actual data is different from forecasted”
Adverse or unfavourable variances occur when actual performance is poorer than budgeted performance, and the business will be financially worse off (either costs are higher or sales are lower – cripes!)
Favourable variances exist if the performance is better than planned, and the business will benefit financially (either lower costs or higher sales revenue than anticipated – yippee!)
Identifying the cause of the variance will allow the firm to; identify what or who is responsible and take appropriate action.

14. Adverse Revenues Lower… Costs Higher… 12 4 12 1 9 1 8 8 11
TR TC Profit
TR TC Profit
TR TC Profit

15. So why don’t businesses just cut costs and crank the price up then?
Favourable
Revenues Higher…
Costs Lower… 6 12 4 14 12 6 8 8 6
TR TC Profit
TR TC Profit
TR TC Profit
So why don’t businesses just cut costs and crank the price up then?

16. Calculating variances: an example
Budget
(£000)
Actual
Variance
Sales revenue
160
180
Labour 45 58
Materials 34 30
Overheads 60
Total costs
139
148
Profit 21 32

17. Calculating variances: an example
Budget
(£000)
Actual
Variance
Sales revenue
160
180
20 (F)
Labour 45 58
13 (A)
Materials 34 30
4 (F)
Overheads 60
Total costs
139
148
9 (A)
Profit 21 32
11 (F)

18. Responding to adverse variances
Once an adverse variance has been identified, its cause(s) must be examined.
For example, it could result from:
An aggressive advertising campaign from rival firms.
Inappropriate pricing.
A sudden and sharp downturn in the economy.
The cause of the variance will determine what action should be taken to rectify it.

19. Responding to favourable variances
A favourable variance means higher than expected profits, so it should also be investigated.
It could be caused by:
Improved labour productivity, resulting from more effective training, reducing unit labour costs.
Cheaper imported supplies, following a rise in the value of the pound.
Stronger than expected sales after a successful advertising campaign.
Identifying the cause of the favourable variance will show what action can be taken to maintain higher profit levels.

20. Tips for tackling exam questions
Learn a concise and accurate definition for all budgeting key terms (see next slide) — use these to earn marks for knowledge.
Using given figures to calculate variances will earn application marks. Make sure you check your answers carefully and state whether the variance is favourable or adverse
Analysis questions may require you to examine the key benefits and/or drawbacks of budgeting, or analyse the causes and/or consequences of variances for a given business.
Evaluation questions may require you to make a judgement on the impact of budget setting, the introduction of zero budgeting or the most effective ways of dealing with variances for a given business.

21. Budgeting key terms (1)
Budget: a financial plan relating to a future period of time.
Budgeting: the process of drawing up budgets by setting targets for future income, expenditure and, therefore, profit in order to manage finance effectively.
Expenditure budget: shows maximum targets for a firm’s key operating expenses (also known as a cost or operating budget).
Income budget: shows minimum targets for a firm’s sales revenue for the forthcoming financial year (also known as a revenue or earnings budget.
Profit budget: shows the planned profit (or loss) for a firm in the forthcoming year.

22. Budgeting key terms (2)
Variance analysis: the process of comparing actual business performance to budgeted figures and attempting to explain the causes of any differences (variances) between the two.
Adverse variance: any variance that results in profit being lower than expected. This could occur if actual revenue is lower than budgeted revenue, or actual costs are higher than budgeted costs.
Favourable variance: any variance that results in profit being greater than expected. This could occur if actual revenue is higher than budgeted revenue, or actual costs are lower than budgeted costs.

23. What can we do about adverse variances?
Improving Revenue
Improve brand image, through marketing and positive public relations
Update or extend the product range to stimulate sales
Break into new market areas (online, national or international)
Cut prices (if sales volume falls less than proportionately than the price increase)
Reducing Costs
Cut wages, through cutbacks or increasing the productivity of the workforce
Work more efficiently, cutting waste – lean production
Use cheaper raw materials

24. Delegating budgets
Budgets have been ‘decentralised’ over recent years – no longer controlled by a central body
Why?
Removes the need for ‘middle managers’ to control budgets
Improve employee participation in business decision making
Motivational – employees have a genuine say in business activity and additional responsibility of controlling the budget
Budget targets encourage improved performance (especially sales)

25. Factors to consider
Training will be required to ensure that ‘budget-holders’ can interpret and effectively control the budget
Budgets need to be transparent; it is easy to deliver favourable budgets if costs are knowingly overestimated or sales forecasts are unrealistically low
A short-term decision to improve a budgetary variance could be at the detriment of long-term success