1. AS Business Studies: Finance
Using Budgets
AS Business Studies: Finance

2. 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

3. 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.

4. 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?

5. 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.

6. Examples
Favourable Variance
Adverse Variance
Examples
Causes

7. 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

8. 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

9. 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

10. 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.

11. Responding to Adverse Variances

12. Responding to Adverse Variances

13. Responding to Adverse Variances

14. Responding to Adverse Variances

15. 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.

16. 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

17. 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.

18. 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?

19. 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