3.

9 Budgets (HL)
Key topics

1.The purpose and importance of budgeting

2.Setting budgets
3.Limitations of budgeting
4.Variance analysis
 BUDGETING

Learning intention:
To be able to prepare budgets and analyse their use in
business decision-making

3 to 4 6 to 7
5 to 6
I can explain the I can analyse
I can prepare a
meaning of and interpret the
budget based on
budgets and results of a
data provided
budgeting budget
 High performance targets
• Be flexible thinkers

• Use big and complex ideas

• Work with speed and accuracy

• Show ability to evaluate and self correct.

 Starter
Your house has burnt down and you have to move
to a new one soon. Your parents have given you
1,500 USD to furnish your bedroom from nothing
from IKEA in United States.
•Prepare a budget.
•Compare your budget with a partner.
•Why is this exercise necessary?
•Any problems encountered when preparing the budget?
•Use IKEA Online Catalogue to help with costings
 A Budget…
• Is a financial plan showing the expected
revenue and expenditure of an
organisation (or a department within an
organisation) for a given period of time.

• A budget can be stated in terms of

financial targets such as planned sales
revenues, costs, cash flows or profits.
Types of budgets
 Types of budgets

• Sales Budget – forecast how many products a business aims to

sell over a given time period
• Staffing Budget – monetary costs of staff required over certain
time period
• Production Budget – planned level of output for time period
• Marketing Budget – amount planned for advertising and sales
promotion expenditure to achieve budgeted sales
• Zero Budget – sets each budget holder’s account to zero per time
period. Budget holder needs to justify the money applied for.
• Flexible Budget – allow production and sales budgets to change
according to sudden changes in level of customer demand
• Master Budget – Consolidated overall budget
 BUDGETING
Learning intention:
To be able to prepare budgets and conduct variance
analysis for strategic planning

5 to 6
3 to 4 6 to 7
I can calculate
I can explain I can analyse
variances from
stages involved and interpret
actual and
in setting budgets variances
budget figures
 Activity 1 BM budget
• As new HoD for Business, prepare a budget
for the 2 years based on the current prices.
• Assume all students must get at least one text
book.
• As HoD, you have freedom to decide on the
quantity per item per student and also on any
additional items that will aid learning
• Assume no students bring their own stationery
 Setting Budgets
An organisation might set its budgets based on:
1.Available finance will affect amount of
budgeted expenditure
2.Historical data used as basis
3.Organisational objectives need to be
incorporated into budget
4.Benchmarking against nearest competitors
5.Negotiations between budget holders and
senior mgt of master budgets
 LEARNING OBJECTIVES
1. TO EXPLAIN THE PROCESS OF
BUDGET SETTING (4)

2. TO CALCULATE VARIANCES AND

INTERPRET MEANING (5)

3. TO EVALUATE THE USE OF BUDGETS

AS A DECISION MAKING TOOL
 The process of setting budgets
Change in Change in the
economic law
environment

Change in
costs

Changes in
Changes in fashion
competitor strategy
 Cost and profit centres
• Read page 320
• Answer questions 3.9.3 on page 321 in
pairs
• Share your answers with the class
 Variance Analysis
Variance = Actual outcome – Budgeted outcome
• This looks at the difference between the figure that
the business budgeted in the budget and the actual
figure

- The figure can be favourable (F) where the business

spent less or made more than expected i.e. the
discrepancy is financially beneficial to the business.

- The figure can be adverse (A) aka unfavourable

variance where the business spent more or made
less than expected i.e. variance is financially
detrimental to the business.
See page 323 for worked example
Task: 3.9.4 Page 323
Example: Calculate the variance & indicate whether it’s F or A

Budgeted Actual value ($)Variance ($) Variance (%)

value ($)

Sales 500,000 550,000 50,000 F 10%

Raw materials 150,000 180,000 30,000 A 20%

Staffing 250,000 230,000 20,000 F 8%

Marketing 120,000 140,000 20,000 A 17%

Rent 200,000 200,000 0 0%

Variances can be expressed in monetary terms or in % to show the

discrepancy between budgeted and actual values.
Task: express the above variances in %
 Variance analysis: Worked example

• Complete the missing figures in the “Variance” column and state

whether the variance is adverse or favourable. (5 marks)

Budge Variances for The Wok Express

5
Actual figure Budgeted figure Variance ($) Variance (%)
($000) ($000)

Sales 500 495 5000 F 1%

Cost of sales 200 210 10 000 F 5%

Gross Profit 300 285 15 000 A 5%

Expenses 100 90 10 000 A 10%

Net Profit 200 195 5 000 F 2.5%

 Exam Style Question
• Q 3.9.4 page 323

Laptops R Us
 SMART Budgeting
• Specific
• Measurable
• Agreed
• Realistic
• Time constrained
 Budgets
Purpose Limitations
• Unforeseen changes
• Planning and • Overestimate budgets
guidance • No incentive to under-spend
• Process can be costly
• Coordination • Resentment when set by
• Control senior mgt
• Not flexible
• Motivation • Can discourage staff
cooperation
• Solely quantitative tool