Business M 3.9 HL

Budgeting

Cost centres

A division of a business that has responsibility for its own operational costs.

They don’t generate revenue, they contribute to overall costs of organization

Profit centres

A division of a business that has responsibility for both costs and revenues generated within the department.

These departments sell to generate revenue

Role of profit and cost centres

• compare costs/profits across different areas

• can help set price

• helps with the management of organisations to improve efficiency

• Targets can be set to motive workers

Budgets

a financial plan of expected revenue and expenditure for a period of time.

Allows resources to be allocated according to the expected level of activity

Prescribed budget table format

ROW = Revenue, sales revenue, interest earned, total revenues - costs, salaries and wages, materials, rent, advertising, electricity, total costs. - excess of revenues over (under) costs

COLUMNS = budgeted figures, actual figures, variance

Variance

The difference between the budgeted figure and the actual figure.

Variance notation

F = favourable variance, like more sales

A = Adverse variance. like having more costs than budgeted

Importance of analysing budgets and variances

• allows business to see trends in short and long term

• Helps businesses see where resources are

• Ensure that everyone in the business is following the agreed limits and targets

Limitations of budgeting

• unknowns, disruptions, shocks

• over inflation by budget heads

• time consuming

• can lead to unnecessary spending