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Using Budgets

Using Budgets. AS Business Studies. Aims & Objectives. Aim: Understand variance analysis Objectives: Define variance analysis Explain the causes of variance Analyse managerial reactions to variance analysis Evaluate the usefulness of variance analysis. Starter. Define a budget

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Using Budgets

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  1. Using Budgets AS Business Studies

  2. Aims & Objectives Aim: • Understand variance analysis Objectives: • Define variance analysis • Explain the causes of variance • Analyse managerial reactions to variance analysis • Evaluate the usefulness of variance analysis

  3. Starter • Define a budget • Give 2 advantages to the business of using budgets • Give 2 disadvantages to the business of using budgets.

  4. + / - of Budgeting

  5. Bob’s Beer Budget • Bob • University Student • Budgeted his first week at university • After his first month he realised that his actual amount spent was different

  6. Bob’s Beer Budget

  7. Bob’s Beer Budget

  8. Bob’s Beer Budget • Bob blew his budget in the first week!

  9. Variance Analysis • Variance: the difference between a budgeted figure and the actual figure achieved. • Variance Analysis: is the comparison by an organisation of its actual performance with its expected budgeted performance over a period of time.

  10. Favourable Variances Favourable Variances: • A better result than expected • Budgeted figure is less (costs) or more (revenue) than expected. • Leads to higher than expected profits Evaluation: Favourable variances are not always good, as cheaper costs, may mean that quality of goods suffers as a result!

  11. Adverse Variances Adverse Variances: • A worse than expected result • Costs higher or revenue lower than expected • Should lead to lower than expected profits

  12. Worksheet

  13. What causes variances? • In groups discuss what the main causes of favourable and adverse variances may be?

  14. Favourable Variance Causes

  15. Adverse Variance Causes

  16. Decision Making • Variances affect decision making by managers. Task: Identify the potential drawbacks of the following management reactions to adverse sales variances.

  17. Adverse Sales Variance Reactions

  18. Adverse Sales Variance Reactions

  19. Adverse Cost Variance Reactions Task: Identify the potential drawbacks of the following management reactions to adverse cost variances.

  20. Adverse Cost Variance Reactions

  21. Adverse Cost Variance Reactions

  22. Highcroft Hotels Case Study

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