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Unit 2 - Budgeting and variance analysis :star: - Coggle Diagram
Unit 2 - Budgeting and variance analysis
:star:
Purposes of budgeting
Motivation - it provides workers with targets and standards
Planning- it plans for the future and anticipates problems and their solutions
Efficiency - gives financial control to lower levels of management who are best able to make decisions at their point within the organization.
Zero- based budgeting
= where no money is allocated for costs unless they can be justified by the fund holder
:check: staff motivation might improve because evaluation skills are practiced and a grater knwodlege of the firm might develop
:red_cross: time consuming as it involves collection and analysis of detailed information
:check: eliminate inefficient practices and unnecessary cost
:red_cross: Managers may not be prepared to justify spending on certain costs that might have benefited the business.
Historical figures
= quantitative information based on past trading records
:check: Realistic as it is based on actual results
:check: The system is relatively simple to operate and easy to understand.
:red_cross: Assumes activities and methods of working will continue in the same way.
:red_cross: No incentive for developing new ideas.
Difficulties of budgeting
Setting up budgets may lead to conflict between department of staffs
Budgeting may be useless as business set over ambitious objectives.
Problems may arise as figures are not actual figures
Variance analysis
= the process of calculating variances and attempting to identfiy their causes
Variances can be either :
Favourable ( better than expected)
Adverse ( worse than expected)
Favourable =Profits were higher than expected,Expenditure was lower than expected in the budget.
Adverse = opposite of favorable
Calculation = Actual - budgeted
Causes of variances :
Action of competitors
-changes in the economy
Action of suppliers