BUDGETING
CHAPTER 32
GROUP 3
WHAT IS
BUDGETING?
BY DEFINITION A BUDGET REFERS TO
THE FINANCIAL PLANNING AN
INDIVIDUAL/ INDIVIDUALS WITH THE
A I M O F E I T H E R U N D E R S TA N D I N G
T H E I R E X P E N D I T U R E O R P R E PA R I N G
FOR PROSPECTIVE FINANCIAL
EXPENDITURE. FOR BUSINESSES
FINANCIAL [Link] DECISION
A R E V E R Y I M P O R TA N T
IF A BUSINESS FAILS TO PLAN:
• It will be without direction or purpose meaning it will be wasting time and
money which are essential to any entity.
• It will be unable to allocate the already scarce resources of the business
effectively
• It will have demotivated employees with no plans or targets to work towards
• It will be unable to measure its progress by measuring the plans against actual
progress .
Therefore planning for the future must take into account the financial needs and
consequences which is part of the budgeting process : setting and agreeing
financial targets for each department of the business. Budgets should be put on
sales, revenue and costs since these are the basic financial aspects that a business
has to keep watch on .
A D VA N TA G E S O F U S I N G D I S A D VA N TA G E S O F U S I N G
BUDGETS BUDGETS
• Planning- Budgets make managers of a • Lack of flexibility- since their funds are all
business consider realistic and attainable future accounted for using a budgets the business has
targets. no other funds to use for let’s like uncounted
• Allocations resources- Budgets are an effective for damage to inventory etc.
way of making sure the business does not use • Training on budgets- Keeping a budget May
more than it needs to. not be easy on managers meaning they will
• Measuring and setting performance – Once have to delegate their managers as it needs
budgeted period ends the business can use data extensive training to do this role.
from a variance analysis to compare the • Unnecessary spending – if managers have
performance of the business as whole underspent their budgets just before the end of
especially its managers the budgeting period they might make
decisions to spend unnecessarily so the same
level of budget can be justified next year.
BUSINESS
The measure of performance PERFORMANCE
Managers of a business need consider how to measure
DEFINITION:
the performance of the business. Assessing actual
performance against pre-set targets is the best way of In general, business
measuring the over time of each section of a performance is considered to
[Link] be the company's ability to
profit from the resources and
achieve its objectives.
KEY FEATURES OF EFFECTIVE
BUDGETING Remember:
When something is deemed effective, it means it has an intended
or expected outcome, or produces a deep, vivid impression.
• An effective budget has a plan that has business aims to fulfill .
• Budget setting must involved participation
• Coordination between departments when establishing budgets is essential
• The budgets must have a measurable outcome of operation.
• Budgets are used to review review the performance of each manger controlling
a cost or profit centre.
BUDGETING
LEVELS
T H E R E A R E S E V E R A L WA Y S I N W H I C H
B U D G E T L E V E L S C A N B E S E T:
INCREMENTAL BUDGETING
• What Is Incremental Budgeting?
Incremental budgeting is the process of
creating a new budget by making minor
changes to the current budget. An incremental
budget uses the current year's budget as a
baseline, which finance teams then adjust by
incremental amounts. It however does not
allow for unforeseen events.
ADVANTAGES AND
DISADVANTAGES OF
INCREMENTAL BUDGETING
ZERO BUDGETING
Zero-based budgeting (ZBB)
is a budgeting technique in
which all expenses must be
justified for a new period or
year starting from zero, versus
starting with the previous
budget and adjusting it as
needed.
THE
ADVANTAGES
AND
DISADVANTAGES
OF
ZERO
BASED
BUDGETING
hat is an example of a flexible budget?
FLEXIBLE
An example of a flexible budget would be a business whose rent is
always the same (a fixed cost) but whose inventory costs fluctuate (a
varying cost) based on sales. The business could use a flexible budget to
BUDGETING
help plan its finances.
A flexible budget is a form of
budgeting that helps managers
and business owners cope with
volatile income and
expenditures. It is defined as
the level at which a company's
income exceeds its expenses
by a given percentage
ADVANTAGES AND DISADVANTAGES
OF FLEXIBLE BUDGETING
VARIANCE
ANALYSIS
W H A T I S A VA R I A N C E A N A L Y S I S ?
D E F I N I T I O N : VA R I A N C E A N A L Y S I S I S T H E S T U D Y O F
D E V I A T I O N S O F A C T U A L B E H AV I O U R V E R S U S
F O R E C A S T E D O R P L A N N E D B E H AV I O U R I N B U D G E T I N G O R
MANAGEMENT ACCOUNTING.
Variance analysis is usually performed on a monthly, quarterly, or annual basis, depending on the reporting
period of the business. It is an important tool for businesses to monitor their financial performance, make
informed decisions, and improve their operations.
Variance analysis has crucial role in financial decision [Link] is important because:
• It identifies performance trends
• It improves budgeting accuracy
• It monitors business performance
• It helps to control costs
• It helps business make informed decisions.
This variance analysis is made using variances which is the difference between a budget and the actual
figures achieved at the end of the budget period.
I F T H E VA RI A N CE I N C R E A S E S P R O F I T A B O V E T H E B U D G E T , T H E N I T
I S A FAV O U RA B L E VA RI A N C E H O W E V E R ,
I F T H E VA RI A N CE R E D U C E S P R O F I T H E L P T H E B U D G E T , T H E N I T I S
A N U N FAV O RA B L E VA R I A N C E O R A N A D V E R S E VA R I A N C E .
CAUSES OF ADVERSE C A U S E S O F FAVO U R A B L E
VA R I A N C E S VA R I A N C E S
• Revenue is low to budgets because fewer • Revenue was higher than budget due to unexpected
units than budgeted where sold or the economic growth or less competition.
selling price was lower due to competition • Raw materials costs were lower than unexpected
meaning the cos per unit of materials decreased
• Raw material costs were higher than
• Labour costs are below budget because of lower
expected meaning the cost per unit of
wage rates or quicker completion of work
materials increased
• Overheads costs were lower than budgeted maybe
• Labour costs are above the budgets because because of a reduction in the interest rate on loans.
of wither a wage rate increase or longer
labour times
• Overhead costs were higher than budgeted.
THE END
P R E S E N TAT I O N B Y G R O U P 3
