3.9 Budgeting

Profit centre

: section of a business to which both costs and revenues can be allocated.

Adverse variance

exists when the difference between the budgeted and actual figures leads to a lower than expected profit.

Variance analysis

: process of investigating any differences between budgeted figures and actual figures.

Favorable variance

exists when the difference between the budgeted and actual figures leads to a higher than expected profit.

Budget

detailed financial plan for the future

Delegated budgets

control over budgets is given to less senior management

Incremental budgeting

uses last years budget as a basis and an adjustment is made for the coming year

Zero budgeting

setting budgets to zero each year and budget holders have to argue their case to receive any finance

Cost centre

section a of a business, such as a department, to which costs can be allocated or charged

Profit centre

section of a business to which both costs and revenues can be allocated

Variance analysis

process of investigating any differences between budgeted figures and actual figures

Budget

Detailed financial plan for the future

Planning; effective allocation of resources; setting targets to be achieved; coordination; monitoring and controlling; modifying; assessing performance

7 benefits of setting budgets

Delegated budgets

Control over budgets is given to less senior management

Incremental budgeting

Incremental budgeting uses last year's budget as a basis and an adjustment is made for the coming year

Zero budgeting

Setting budgets to zero each year and budget holders have to argue their case to receive any finance

Lack of flexibility; too focused on the short term; lead to unnecessary spending; training needs must be met; revised budgets may need to be set for new projects

5 potential limitations of budgets

Cost centre

Section of a business, such as a department, to which costs can be allocated or charged

Profit centre

Section of a business to which both costs and revenues can be allocated

Variance analysis

Process of investigating any differences between budgeted figures and actual figures

Favorable variance

Favorable variance exists when the difference between the budgeted and actual figures leads to a higher than expected profit

Adverse variance

Adverse variance exists when the difference between the budgeted and actual figures leads to a lower than expected profit