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Chapter 19 - Budgets - Coggle Diagram
Chapter 19 - Budgets
Meaning and purposes of budgets
Budgets are future financial plans drawn up with the aim of giving some focus and parameters for business activity
Can encompass financial budgets and non-financial activities
Measurements of performance
Set for cast, sales, marketing, production, administration, costs
Improves the performance of a business because they can help with business planning, provide targets, aid allocation, motivate departmental managers
Benefits and drawbacks of budgets
Benefits
Introduce an element of financial control
Allow senior management to identify underperforming departments, and take action
Targets are motivating if they are realistic
Allows managers to see the impact of their budget, and those of other managers on the overall aims of the business
Drawbacks
Unrealistic budgets demotivate employees
Managers argue a case for a higher budget than necessary
Inflexible budgets prevent a business form reacting to change
Meaning and use of incremental budgets, flexible budgets and zero budgeting
Incremental budgets
Take the overall objective as a starting point
Break down the business objectives into departmental or divisional budgets
Based on what happened in previous years, with future predictions
Discussion with budget holders to agree budgets based on objectives and relevant information
Flexible budgets
Flexibility between budgeted figures and actual figures
Costs associated with output or sales would be flexed to match the actual level of output or sales
If output was lower than the budgeted, then it is unrealistic for production to budget for the same amount of materials
Zero budgeting
Ignores any previous budgets, and requires each budget holder to put forward a case for the next period budgets
Need to product a plan for what they expect to achieve and what they need to achieve it
Prevents 'budget creep' when departmental budgets are increased slightly each year without analysis taking place
Purpose of budgets for allocating resources and controlling and monitoring a business
Resource allocation
Setting of budgets is likely to encourage a detailed plan of what resources will be needed and how resources are to be allocated in order to achieve the best outcome
Controlling and monitoring an business
Inefficient use of resources can be identified and corrected
Progress towards achieving corporate or department objectives
Overspending budget holders can be identified and the cause of any over-spend can be investigated
This performance and progress of a department or division can be measured against the budget
Appraising a business
The success of a business can be measured by how well it meets the targets contained in its business
These budgets may be closely related to business objecties
A business that exceeds the expectations in the budgets would be judged to be successful, whole one that fails to meet expectations outlines in its budgets would need to investigate the reasons for underperformance
Variances
The meaning of adverse or favourable variances
The difference between the budgeted outcome and the actual outcome is known as variance
When an actual outcome is different from the budgeted outcome
An actual figure achieved can be better or worse than the budgeted figure, when it is worse it is said to be 'adverse; when it is better it is 'favourable'