HKDSE BAFS - Financial Management 2 - Budgeting

Budget

A forecast of future income and expenses. It is a quantitative expression of a plan.

Budgetary control

The establishment of budgets and the continuous comparison of actual results with budgets to ensure that the firm's plan is put into practice

Budgeting variances

The difference between the budgeted and actual amounts

Favourable budget variance

When the budget variance results in:

1) Actual revenue is more than budgeted amount

2) Actual cost is lower than budgeted cost

Unfavourable budget variance

When the budget variance results in:

1) Revenue is less than budgeted amount

2) Actual cost is higher than budgeted cost

Sales variance

The difference between actual and budgeted sales.

3 Common Causes:
- Selling Price
- Sales Volume
- Product Mix

Materials variance

The difference between the actual and budgeted raw material costs

2 Common Causes:
- Material Price
- Material Usage

Labour variance

The difference between actual and budgeted labour costs

2 Common Causes:
- Wage Rate
- Labour Efficiency

Master budget

a set of interrelated budgets that constitutes a plan of action for a specific time period

Operating budgets

budgets that communicate an organization's sales and production goals and the resources needed to achieve these goals

Financial budgets

budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals

Sales Budget

an estimate of expected sales revenue for the budget period

Purposes of budgeting

Planning Coordinating Controlling

Remedial Actions

Actions to rectify and correct any problems that lead to unfavourable budget variances.