Budgeting and Variances

Budgetary Control

Planning

• Forces managers to set targets and give direction.

• Budget provides a benchmark against actual performance

Control

• Results can be compared

• what expected to happen - budget

• what did happen - actual result

• Once it is investigated and identified action can be taken

Forecasting

• Prediction of events where no control is exercised

Fixed Budgets

• Produced for single activity level

• Budget remains the same

• Produced at the beginning of the period

Flexible Budgets

• Recognises behaviour patterns

• Designed to change with volume of activity

• Represents costs and revenues

Flexible budgets - cost behaviour and nature principles

• Variable costs - increase in activity

• Fixed costs - constant as activity increases

  Example - overheads

• Sales Revenue - more nits sold = constant selling price

Variance

Difference between actual and budgeted costs

Adverse Variance

Costs EXCEEDS budget costs

or

Revenue is LESS than the budgeted revenue

Favourable Variance

Actual cost = LESS than the budgeted cost

or

Revenue EXCEEDS budgeted revenue

Variance Calculation

Comparison of ACTUAL costs with EXPECTED costs or REVENUES in a

• Variance= Actual - Budget

Evaluating the significance of a variance

Variance Calculation

% = Variance DIVIDED by Budget x 100

Causes of Variances

Leads to budgets not being 100% accurate as prediction of future is difficult to get right

Sales Variances

Price Changes

• Discounts can cause a product to be at a lower or higher price

• Legislation can enforce price change

Volume Changes

• More or less products sold

• Good or bad advertising = amount of products sold

• Changes in market conditions

Material Variances

• Materials purchased - bulk discounts offered can change price per unit

• Higher delivery charges

• Quality in material - higher quality = higher price

Labour Variances

Rate changes - pay

Efficiency - hours worked - longer = cost more

hours worked - less = cost less

Overtime - higher rate than normal hours = increase in LABOUR COSTS

Solutions of Variances

ADVERSE

• Sales - lower price of finished goods - increase volume of sales

  or

  increase advertising to improve sales

• Materials - Cheaper suppliers

Negotiate discounts

Purchase better quality = less wastage

• Labour- Better supervision of staff and provide more training

• Monitor budgets