iGCSE Business Remember - if it makes it more profitable it is positive, if it makes it less profitable it is ADVERSE!

1. Budgeting & Variance

2. Lesson Objectives
 What are budgets?
 How do businesses use budgets?
- Variance Analysis
 How do businesses benefit from budgets?
 How are budgets produced?

3. Types of budgets
 Almostall activities of a business can
be budgeted. These include:
 Sales budget
 Expenditure budget
 Profit Budget

4. What is budgeting?
 Budgeting involves defining financial objectives,
assessing finances and using this information for
financial planning.
 Once the financial manager has an understanding
of how the business stands financially he can set
budgets.

5. Benefits of Budgeting
 It helps to predict what will happen in the future
 It sets targets
 They help monitor performance
 They help control performance
 They help in business planning
 They can be used as a source of motivation as they
involve a consultation process
 They are a form of communication

6. Past, Present, Future

7. The process of budget setting
 The business is broken down into a series of
control centres
 Each manager has responsibility for managing
the budget for their control centre
 Each manager is kept informed of their own
performance and that of other budget holders

8. How are the Budgets decided?
Managers will look at:
 Past results & costs
 Planned Output
 How money has been allocated in the past
 Business Objectives for the coming period
 Consultation with managers
 Forecasts for markets and prices

9. Variance Analysis
 Variance analysis is Favourable variances mean
used to calculate the that the actual performance
difference between any of the organisation has been
actual and budgeted better than expected – likely
figures. to increase profit
Adverse variances mean that
After calculation the the actual performance has
variance should be been worse than expected
interpreted as follows: -likely to reduce profit

10. Profit Variance
 The difference between budgeted profit and
actual profit
 This can be broken down to revenue variances
and cost variances
 These variances can in turn be broken down
further

11. Sales Variance
 Sales variance – the difference between
actual sales revenue and budgeted sales
revenue
This can be broken down into:
- Sales volume variance (how sales differed from
target)
- Price variance (how actual price differed from
expected price)

12. Cost Variances
 Material price variance – the difference between the
budgeted cost of raw materials and the actual costs
 Material usage variance – the difference between the
budgeted quantities of raw materials & supplies against
the actual quantities used
 Labour rate variance – the budgeted wage bill compared
to the actual wage bill
 Labour efficiency variance – the budgeted number of
man-hours to complete tasks compared to the actual
time taken