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Budgets 3.9 (Role (Not a forecast yet derived from forecasts - they are…
Budgets 3.9
Cost centre
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- Hotel : Restaurent, bar, reception
- In manufacturing: products, departments, factories
Importance
If there are no financial plans an organisation drifts without real purpose / direction. Managers will not be able to allocate the scarce resources of the business effectively without a plan to work towards. Employees will feel demotivated as there are not targets to work towards, if none are set progress cannot be reviewed.
Budgets will be used to review the performance of a department, managers will be appraised with regards to the targets set and subsequent achievements
Variances :
A tool used to compare a business’ budgeted expenditure with the actual expenditure over a period of time.
Favourable: The outcome was better than the budget
Adverse: The outcome was worse than the budget
No Variance: The outcome was exactly as expected
Revenue variance: favourable = higher revenue than budgeted, adverse = lower revenue than budgeted, no variance = the exact revenue than budgeted
Cost variance: Favourable = actual costs are lower than budgeted costs, adverse = actual costs are higher than budgeted costs, no variance = the same
Profit variance: favourablele = actual revenue is greater than budgeted revenue, adverse = actual revenue is lower than budgeted revenue, no variance = they are the same
Role
Not a forecast yet derived from forecasts - they are plans aimed to fulfil. These can be produced for any part of the organisation if the outcome is quantifiable.
Co-ordination between departments is essential. Targets need to be established regarding the budgets.
"A tool to help financial planning and is used to set out plans for spending over a period of time. "
Incremental budgeting: uses last years budget as a foundation. Adjustments are then made for the year.
Zero-based budgeting: Setting the budget to zero annually for each department. Budget holders have to justify their case to receive finance
Companies are legally obliged to publish profit and loss accounts, whereas budgets are internal documents used for planning.
Budgets can be for any part of the business, whereas profit and loss accounts record all revenues and costs from the entire business.
Profit centre
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- Each product in the portfolio of the business
- Each branch of a chain of shops
Due to COVID-19, C&A will use historical budgeting of the year 2019 rather than 2020 to set budgets for 2021. This is due to the unforeseen impact of the virus which cannot be accounted for in the future as it is not an event that will occur annually.
Revenue + profit variances can only be calculated for profit centres as cost renters do not generate income