1. 224 Budgets AS Edexcel New Specification 2015 Business
By Mrs Hilton for

2. Lesson Objectives
To be able to identify the purpose of a budget to a business
To be able identify the types of budgets; historical figures and zero based
To be able calculate variance analysis
To be able to discuss the difficulties of budgeting
To be able to answer sample exam questions based on the topic area

3. From the specification
a) Purpose of budgets
b) Types of budget:
historical figures
zero based
c) Variance analysis
d) Difficulties of budgeting

4. Guidance from Edexcel

5. Purpose of budgets

6. The purpose of budgets
This is a financial plan and an agreed spending limit within a business
Heads of Department in a school get a budget for books, folders, speakers and trips
Budgets are based on the objectives of the business or organisation
It means managers must think ahead and not just spend an unlimited amount of money in their department
Usually 12 months so that it fits with the accounting period of a year, but research and development budgets (e.g. a cure for cancer) might have a longer term budget

7. Why would a business set a budget?
Planning; to anticipate problems and develop solutions before they arise e.g. New business books are needed for a new spec
Motivation; for managers to be in control of their own budget shows that the business feels they are responsible and will hold them accountable for the money
Decisions; gives power to make financial decisions to those in the best position to make them e.g. a Headteacher may not know what kinds of books need to be ordered
Control: Budgets are set against objectives and targets and can be used as a comparison tool to measure success

8. historical figures

9. Historical figures budget
This is a budget set for the business using current financial figures
Realistic in that it is based on last years sales
Business is dynamic so the figures may be wrong
How much money will you spend?
How much will you sell?
How can you cut costs?
Not about Henry Eighth he’s just here to help you remember the name of the budget

10. zero based

11. Zero based budgeting
This is a budget set for a business by using figures based on potential performance
This method takes away all historical assumptions and starts with a clean slate
May also be used by a start-up with no historical data
Managers must justify levels of expenditure based on the number of customers they are likely to serve in the next year

12. Variance analysis

13. Variance analysis
Analyse the budget figures against what actually happens – there might be a variance
Favourable variance – the manager has underspent in his department, this would be regarded as a success as any costs cut will have an impact on profit
Adverse variance – the manager has overspent and it would depend on the reasons, perhaps they needed more staff than was budgeted for and had to hire during the year
Looking at variances and finding reasons behind them can improve the performance of a business

15. Calculate the variance on these figures and say if they are adverse or favourable
Jan £
Feb £
Mar £
Budgeted income
19,000
20,000
30,000
Actual income
16,600
22,000
Variance
Favourable or adverse?
Goal here is to make more income than budgeted
Jan £
Feb £
Mar £
Budgeted expenditure
11,000
Actual expenditure
11,500
12,000
9,000
Variance
Favourable or adverse?
Goal here is to spend less than budgeted

16. Difficulties of budgeting

17. Difficulties of budgeting
Budgets are often fixed for a year and as such inflexible, difficult when business is dynamic
Tendency for managers to spend up to the limit
Time consuming to prepare, monitor and control
Cannot include unexpected events – can just provide a contingency fund
Unrealistic budgets can be demotivating
Budgets can cause inter-department rivalry as some departments get more money than others
Can make managers short-term and short-sighted, they become budget driven rather than customer driven
Some industries its difficult to plan ahead because of large unplanned changes e.g. in farming the weather can have a huge impact on crops

18. Sample questions

19. Sample question 1
8 marks Case study for Ocado on next slide

22. Sample question 2
4 mark question Figure 1 on next slide Case study on slide after that

25. Answer question 2

26. Revision Video

27. Glossary
Budgets; the purpose of a budget is as a forecasting, planning and motivational tool, they can be on income or expenditure
Zero based; Budget is based on a prediction of performance usually for a start up
Historical figures; Budget is based on previous performance of sales and costs
Variance analysis; Variance is the difference between the budgeted and the actual figure