1. Using Budgets AS Business Studies

2. Aims & Objectives Aim: Understand variance analysis Objectives: Define variance analysis Explain the causes of variance Analyse managerial reactions to variance analysis Evaluate the usefulness of variance analysis

3. Starter Define a budget Give 2 advantages to the business of using budgets Give 2 disadvantages to the business of using budgets.

4. + / - of Budgeting -Control finances. -Measure performance. -Improve staff performance/motivation. - Cause conflicts between departments. -Over ambitious targets may be set resulting in demotivation. -Budgets will only be motivating if the whole dept has created them.

5. Bob’s Beer Budget Bob University Student Budgeted his first week at university After his first month he realised that his actual amount spent was different

6. Bob’s Beer Budget ItemBudgeted Cost £Actual Cost £Difference +/- £ Food5015 Alcohol20112 Fancy Dress2072 Cleaning Products50 Train Ticket Home30 Total125229

7. Bob’s Beer Budget ItemBudgeted Cost £Actual Cost £Difference +/- £ Food5015 + 35 Alcohol20112- 92 Fancy Dress2072- 52 Cleaning Products50+ 5 Train Ticket Home30 0 Total125229-104

8. Bob’s Beer Budget Bob blew his budget in the first week!

9. Variance Analysis Variance: the difference between a budgeted figure and the actual figure achieved. Variance Analysis: is the comparison by an organisation of its actual performance with its expected budgeted performance over a period of time.

10. Favourable Variances Favourable Variances: A better result than expected Budgeted figure is less (costs) or more (revenue) than expected. Leads to higher than expected profits ItemBudget £Actual £Variance £ Sales Revenue50,00060,00010,000 favourable Fixed Costs15,00012,0003,000 favourable Evaluation: Favourable variances are not always good, as cheaper costs, may mean that quality of goods suffers as a result! Evaluation: Favourable variances are not always good, as cheaper costs, may mean that quality of goods suffers as a result!

11. Adverse Variances Adverse Variances: A worse than expected result Costs higher or revenue lower than expected Should lead to lower than expected profits ItemBudget £Actual £Variance £ Sales Revenue50,00040,00010,000 adverse Fixed Costs15,00017,0002,000 adverse

12. Worksheet BudgetActualVariance Sales Revenue£650,000£645,000 Fixed Costs£46,000£44,000 Labour Costs£230,000£256,000 Material Costs£98,000£94,000 Profit£276,000

13. What causes variances? In groups discuss what the main causes of favourable and adverse variances may be?

14. Favourable Variance Causes 1 Bad publicity for competitors products leads to increased sales 2 Lower interest rates lead to increased sales 3 Consumers have more disposable income 4 Demand for good/service increases

15. Adverse Variance Causes 1 Competitors offer better price deals, lowering sales. 2 Labour productivity falls leading to higher costs per unit 3 Oil prices increase 4 Rent/rates/lighting increases

16. Decision Making Variances affect decision making by managers. Task: Identify the potential drawbacks of the following management reactions to adverse sales variances.

17. Adverse Sales Variance Reactions Could this start a price war with rivals? Might perceived quality be damaged? Lower prices to increase sales Affect promotional budget Rivals might spend even more! Will impact just be short term? Increase promotional spending

18. Adverse Sales Variance Reactions How long will this take? Will new products be successful? Update product range Market research will cost more Will new products need to be developed? Look for new markets

19. Adverse Cost Variance Reactions Task: Identify the potential drawbacks of the following management reactions to adverse cost variances.

20. Adverse Cost Variance Reactions Will quality suffer? Will new suppliers be reliable? Obtain cheaper supplies Impact on motivation Could lead to industrial action - strikes Cut wages

21. Adverse Cost Variance Reactions May need new machinery, staff training, leading to higher costs in SR. Increase Labour Productivity to reduce labour cost per unit May need a change in working practices, short term benefits may be limited. Reduce Waste Levels

22. Highcroft Hotels Case Study