1. Btec Business Studies Unit 2 Assignment 4
Budgeting

2. 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

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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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.

20. 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