Budgets Teacher’s notes included in the Notes PageFlash activity. These activities are not editable. Icons key: For more detailed instructions, see the.
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Budgets
Teacher’s notes included in the Notes PageFlash activity. These activities are not editable.
Icons key: For more detailed instructions, see the Getting Started presentation
Businesses use financial information taken from throughout the year to work out how much is being spent each week or month.
The actual expenditure is then compared against the amount budgeted for. Any differences from the planned budget are referred to as variances.
A budget is a type of plan for a future period, covering relevant costs and revenues that a business will encounter over the coming financial year. If you’ve budgeted before, you’ll know that planning a budget is relatively straightforward, but keeping to it is the harder part.
The main aim is to make sure that the different sections of the business are working together effectively in achieving the overall goals of the business.
What do you think would happen if budget reports were only given at the end of the year instead of at
the end of each month?
The budgeting process involves managers responsible for the budget (called budget holders) drawing up detailed estimates of costs for each department or cost centre of the business, and turning these into spending limits for the coming months.
Internal matters:performance of individuals (ordering)wastage of materialsslow workingequipment faults.
External issues:change in supply and demandshortage of materials and labourchange in economic conditions.
Incorrect budgets:budgets are based on incorrect information.
Variances are differences from the planned budget which occur in the actual expenditure. There are numerous reasons for the occurrence of variances in a budget, which include:
Variances take the form of either favourable (+) or adverse (-). They are worked out using the following formula:
If the department has spent more than the budgeted amount, it is called an adverse (or negative) variance.If the department has spent less than the budgeted amount, it is called a favourable (or positive) variance.
Make a record of your own daily income and expenses for a week.You need to include all relevant income you receive – from parents, working, etc.You also need to include all relevant expenditure you have – entertainment, clothes, shopping, food, transport etc.Use the table on the next slide as a template.
An important first step in preparing a budget is to track your income and expenses.
Now have a go at preparing a budget for yourself…The table on the next slide shows two sections: one for income and one for expenses. Income includes any wages and other sources of money, e.g. from parents. Expenses include food, clothing, entertainment, transportation, savings, and other miscellaneous costs.Can you categorize each source of income and expense that you listed last week? Either copy the table with categories listed, or create a table filled in with your own categories. Then you can estimate projected expenses for the coming month, using your actual expenses you listed over a week as a guide. Over the next month, track the items and see where you come in over or under budget.
Is your total variance favourable (+) or adverse (-)?If your spending doesn’t balance with your income, where will you get the extra money from?If you have any money left over, what will you do with it?Are there ways for you to increase your income? If so, how could you use this money to balance your budget?
Now see how well you have done!Look at the variances (differences) for each item: