Category:3.9 Budgets



 Key Terms 

Budget: Quantitative financial plan which estimates the revenue and expenditure over a time period

Budget Holder: Person involved in the formulation and achievement of a budget

Cost Centre: Section where costs are incurred and recorded

Profit Centre: A section of a business where costs and revenues are identified and recorded

Variance: Difference between the budgeted figure and actual figure

Favorable Variance: When the difference between the budgeted and actual figure is financially beneficial to the firm

Adverses Variance: When the difference between the budgeted and actual amounts is financially costly

Strategic Planning: An organization's systematic process of defining its future direction and deciding on how to allocate its resources to accomplish its vision

 The importance of budgets for organizations   Cost Centres   The role of cost and profit centres   Problems of cost and profit centres   Variance Analysis 
 * Planning
 * Motivation
 * Resource allocation
 * Coordination
 * Control
 * Help managers collect and use cost data effectively. Businesses can be divided into cost centres in some of the following ways:
 * By department
 * By geographical location
 * By product
 * Aiding decision making
 * Better accountability
 * Tracking problem areas
 * Increasing motivation
 * Benchmarking
 * Indirect cost allocation
 * External factors
 * Centre conflicts
 * Staff stress

 The role of budgets and variances in strategic planning:   Advantages  of using budgets and variance in strategic planning:  Limitations  of budgets in strategic planning
 * The course of action involves formulating key goals or objectives derived from the vision and putting in place a series of steps to achieve them.
 * Budgeting and carrying out variance analysis is one of those steps and both play an important role in strategic planning.
 * Help control revenue and expenditure
 * Provide realistic targets that are clearly understood
 * Help in coordination of the various business
 * Based on the SMART criteria and in line with the organization's objectives
 * Variance analysis aims to compare actual performance to budgeted performance
 * Assist in detecting the causes of any deviations in the budget so corrective measures can be taken to rectify them
 * Variance analysis provide an objective way of appraising budget holders responsible
 * Inflexible budgets that don't consider unforeseen changes in external environment
 * Differences between the budgeted and actual results could make the budget lose its importance
 * Long-term future gains such as increased sales potential due to unexpected increases in demand could be lost by looking only at the current budgeted amount
 * Highly underspent budgets towards the end of the year could result in unjustified wasteful expenditure by managers
 * Setting budgets without involving some people results in resentment.