Budgeting Concepts and Variances

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What is budgeting?

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Financial plans for the future over a given period of time that describes the expected levels of expenditure and revenues.

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What do sales revenue budgets include?

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Planned revenue from selling products, expected level of sales, and likely selling price of the product.

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What do expenditure budgets include?

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Planned expenditure on labour, raw materials, fuel, and other items essential for production.

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What is zero budgeting?

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Involves managers starting with a clean sheet and justifying all expenditure made.

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List some benefits of zero budgeting.

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Improves control, helps with allocation of resources, limits budget increases without justification, reduces unnecessary costs, motivates managers to explore alternatives.

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What are the advantages of budgeting?

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Controls income and expenditure, regulates spending, highlights losses, allows corrective action, enables delegation, improves communication, provides clear targets, and can motivate staff.

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What are the limitations of budgeting?

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Time-consuming, can demotivate if targets are imposed, loses significance if actuals differ greatly, inflexibility can miss opportunities, poorly constructed budgets lead to poor decisions.

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What is a favourable variance?

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When actual figures result in higher profits than budgeted, e.g., lower expenditure or higher revenues than expected.

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What is an adverse variance?

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When actual figures result in lower profits than budgeted, e.g., higher expenditure or lower revenues than expected.

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What are some reasons for changes in variances?

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Economic recession, competitor's new product, changes in raw material costs, new suppliers, better-trained employees, or fewer employees producing the same output.