1. IB Business and Management
3.4 Budgeting (HL)

2. Learning Outcomes the importance of budgeting for organisations (AO2)
The difference between cost and profit centres (AO1)
The roles of cost and profit centres
Variances (AO2, AO3)
the role of budgets and variances in strategic planning (AO2)

3. What is a budget?
A budget is a financial plan for costs and/or revenues for a given future period of time.
Budget holders will be given responsibility for different areas of the business

4. UK Government Budget 2013

5. What would the benefits of creating a budget be?
Benefits of Budgeting

6. Why set budgets?
• To control (reduce) expenditure • To forecast outcomes • To allocate resources • To promote forward thinking • To set targets in numerical terms • To assign financial responsibilities to budget holders • To provide motivation for managers • To improve efficiency • To evaluate performance (compare actual performance against the budget )

7. Types of Budget
Sales Budgets
Expenditure Budgets
Master Budget

8. Sales Budgets A sales budget is the budget for sales revenue.
This could be broken down into:
Product Lines
Departments
Branches
What information would be needed in order to produce a sales budget

9. Expenditure Budgets
An expenditure budget is the plan for how much will be spent. This will be broken down into different categories. What type of expenditures will businesses have to budget for?

10. Key Expenditure Types Staffing Raw Materials Training Contingency
Marketing
Utilities
Rent
Maintenance
Equipment purchase
Administration
How could these types be broken down even further in order to create a detailed budget?

11. Master Budgets
The master budget pulls together all of the other budgets to provide an overall plan.
As all costs and revenues are now planned for, budgeted profit/loss figures can be determined

12. Cost and Profit Centres
What are they and what is the difference?
Cost and Profit Centres

13. What is the difference between cost and profit centres?
What might be some examples of each?

14. Profit Centres
This is a section of the business in which both costs and revenues can be identified.
It that part of the business which is accountable for costs and revenues. It may be called a business centre, business unit, or strategic business unit.
Examples of Profit Centres
Each branch of a chain of shops, restaurant or store
A sales person
Each department of a store
Each product of a multi product firm

15. Cost Centres
These are individual parts of the business that incurs costs but is not directly involved in making any profit.
A Cost Centre is part of a business for which costs can be identified and easily recorded. For example:
a functional department such as marketing or human resources
an employee
an item of equipment, e.g. a photocopier, telephone line or vehicle.

16. Costs and Profit Centres – How they are used
As a business grows bigger it becomes more difficult to manage its finances. Often businesses will be divided up into cost/profit centres.
Budgets will be drawn up for each cost/profit centre
Each Cost/Profit centre has a manager who is responsible for decision making and in making sure that budgets are met
Senior managers can monitor the performance of each cost/profit centre over time and also compare with other cost/profit centres

17. Benefits and drawbacks of Cost/Profit Centres?
What do you think are the main benefits of cost/profit centres?

18. In summary…. Advantages of Cost and Profit Centres
Disadvantages of Cost and Profit Centres
Some control of operations is delegated to the local level, which can be motivating
parts of the firm can put themselves before the business as a whole
The success and failures of individual departments can be identified clearly
The reason for good or bad performance may be external to the cost centre, and not under its control
Problems can be traced more easily
Not all costs and revenues can be associated directly with a particular part of the firm
Decision making is aided
They can create extra pressure on more junior managers

19. Approaches to Budgeting
How are budgets set?
Approaches to Budgeting

20. Top Down Budgeting
Budgets are prepared by top management and imposed on the lower layers of the organisation.
What are the advantages/disadvantages of this method?

21. Bottom up Budgeting
Supervisors and middle managers prepare the budgets and then forward them up the chain of command for review and approval.

22. Zero budgeting
Zero based budgets exist when budgets are automatically set at zero and budget holders have to justify their case to receive any funds.
What would be the advantages and disadvantages of using this approach?

23. Zero budgeting
Pros:
Zero-based budgeting represents a move towards allocation of resources by need and benefit.
It creates a questioning attitude rather than one which assumes that current practice represents value for money.
It focuses attention on outputs in relation to value for money.
It leads to increased staff involvement which may lead to improved motivation and greater interest in the job.
Cons:
Effective zero budgeting requires considerable management time spent in identifying and justifying the appropriate budget level.
Bigger budgets may go to those more persuasive managers rather then those most in need of funds

24. Pre-Budgeting Research
What information would managers need to know before they can set budgets for the following year?
Pre-Budgeting Research

25. Setting budgets
Many firms will work on last years budget and other historical data and try and build in adjustments to take account of
expected changes in demand
price changes
cost rises
This is known as Incremental budgeting

26. Other considerations Available finance Company objectives
Planned purchases
Negotiation process

27. Budgets for New Businesses
Budget setting will be harder for a new business as they don’t have access to historical data. What information will they use instead? Information about competitor products Market research Entrepreneur expertise and experience Instinct based on market knowledge

28. Budgetary Control – Variance Analysis

29. Variance Analysis
Budgetary control involves corrective measures being taken to ensure that actual performance meets budgeted performance
VARIANCE ANALYSIS is the practice of examining any differences between budgeted and actual performance and investigating causes
Corrective Action can be taken or amendments to the budget made

30. Budgeting – An ongoing process

31. Budget variances
A Variance is the amount by which the actual result differs from the budgeted figure.
Variance = Actual outcome – Budgeted Outcome
A favourable variance is one that leads to higher than expected profits.
An adverse variance is one that reduces profit.

32. Example Budget - January
Budgeted
Actual
Variance
F/A
Sales
5,000
5,020
Stock
1,050
1,060
Wages
1,400
1,370
Salaries
400
410
Power
200
Profit
1,950
1,980 20
Favourable 10
Unfavourable 30
Favourable 10
Unfavourable 30
Favourable

33. Task
Watch the video clip ‘Variance Analysis’ (7 mins)

34. Analysing Variances
What could the potential reasons be for the following variances? And what should be done?

35. More money has been spent on stock than budgeted for

36. Wage costs are lower than budgeted figures

37. Sales figures are lower than budget

38. Task
Complete the worksheet Edex 6 Budgets and Variances

39. Potential Problems with Budgeting

40. Important issues regarding budgets….
What happens if there is an unexpected change that affects costs or revenues?
What happens if a budget holder spends less than their budgeted figure?
What happens if all of the budgeted amount has already been spent way before the end of the year?
How can it be ensured that budgets are fairly allocated?
What happens if an unexpected opportunity has arisen but it has not been budgeted for?

41. Task – In pairs Write a list of: Benefits of budgeting to a business
Potential Problems with budgeting

42. Summary Watch the video ‘Accounting and Finance - Budgeting’ (6 mins)
Add any additional points to your notes
Do you have any further questions relating to budgeting?

43. Evaluation
A useful management tool. And help to COORDINATE, CONTROL and MOTIVATE
They force businesses to plan ahead and think about the needs of the business
Thought needs to be given to the budgeting process in order to avoid problems associated with budgeting
Good budgets should be flexible and reviewed regularly

44. Homework Task Answer questions a-c Grimsby and Dyke
There are no past IB questions on budgeting (apart from explaining benefits) Is this a sign it is due to come up soon?