2BudgetingWhat is the purpose of budgeting? Is it the same for individuals as it is for businesses?
3Costs and BudgetsA business needs to manage their costs if they want to make a successful profit. By not managing costs a business can loose control of what they are spending and make little or no profit.A business needs to;Keep within a budgetIncrease income to cope with changeMake sure working capital is availableSet aside money in case of emergencies
4Costs There are two main types of costs that need to be controlled; Fixed CostsVariable Costs
5BudgetingBudgeting can be difficult because it sets a guideline for how much a business thinks it will spend in the future.There are a two types of budgeting;Zero Budgeting- No budget is given, each time a department wants to buy something they need management approvalAllocated budgeting- money is allocated per department based upon numbers of employees/ size of department.
6Variance AnalysisThe Variance is the difference between the budget and what is actually spent.If the result is better than expected it is known as favourable. E.g. Joe aims to spend £15 on a birthday present but actually spends £12, he has a favourable variance of £3.If the result is worse than expected it is known as adverse. E.g Joe’s present costs £17, he would have an adverse variance of £2.
7P6- Illustrate use of budgets as a means of exercising financial control. Describe the following for Emma and Johns Hair salon.;the purpose of budgetingthe types of budget (e.g. sales budget, cashflow forecast)how budgets are sethow a budget is monitored against actual performancethe use of variance analysisExplain what their budget shows.
8Break Even Explain the difference between fixed and variable costs. Explain the purpose of a break even chart/ analysis.Explain the calculations used in break even charts.Research the benefits and limitations of break evenProduce a break even chart for Headliners Hair Salon using their data.
9M4- Analyse why costs and budgets need to be controlled. Analyse the reasons why costs and budgets need to be controlled. (M4)
10D3Define what variances are (favourable and adverse)(see this). Examine the problems of not monitoring a business budget and state why budgets need to be managed properly. (D3)Think about the different aspects of the business and consider how they would each be affected if costs were out of control. Consider;EmployeesSuppliersStockProfit LevelsCustomer Service
12D1 Part 2To complete D1 you need to evaluate how managing costs and budgets can help a business to be more successful.Think about the following areas;increases in salesincreases in profitincrease in the customer baseincreases in levels of customer satisfactionincreases in levels of employee satisfactionreductions in labour turnoverincreased efficiency in production/service provision