3.9 Budgets

Profit Centre

A department in a business that generates both income and expenditures, so that its contribution to the profit of the business can be determined.

Cost Centre

A department in a business that generates expenditures, but no income.

Format of a budget

budgeted figures, actual figures, variance

Income
total income
costs
total costs
net income

Variance Analysis

compare a business’s budgeted income and expenditures with the actual figures over a period of time.

Favourable Variance

actual income and expenditure figures are better for the business than expected.

Adverse Variance

actual income and expenditure figures are worse for the business than expected.

No Variance

actual budget was the same as the forecasted budget.

Benefits of Budgeting

Planning
Coordination
Communication
Motivation
Control
Measuring Performance