AS Business StudiesBudgets

Today you will know what a budget is.

You will understand why budgets are set and you will apply this to the case study

Unit 2a: Managing the Business

Budgeting is the process of setting targets covering all aspects of costs and revenues.

A budget is a financial plan that sets out an organisation’s expected costs and revenues over a given period of time.

Budgets set out the policy to be pursued and anticipated outcomes from this policy

Budgeting

The Role of a budget Ensures a business does not overspend

Allocating large budgets to particular departments/divisions establishes priorities for a firm e.g. mobile phone company 3 allocates large budgets to developing 3G mobile phones

Budgets encourage delegation of responsibility and allow decisions to be made by managers who are more knowledgeable of the department/division than senior managers at the top of the hierarchy.

Assign responsibility to the budget holder, therefore much easier to trace mistakes and recognise success

Improve efficiency

Time consuming

Management need the skill to do this

May not understand the department well

Need good research data

Level of inflation (prices) may be difficult to predict

The budget may be imposed

Problems of setting budgets

Benefits of using budgets

They provide direction and co-ordination. Budgets ensure spending is geared towards the aims of the business rather than the individual.

Giving staff responsibility for budgets and recognition when budget targets are met has a motivating effect. Pay and rewards may be linked to staff meeting budgets.

Working to budget restrictions improves efficiency

Monitoring and reviewing budgets allows successes and failures to be investigated.

Budgeting encourages careful evaluation of future possibilities and realistic planning.

Drawbacks in using budgets Budgets are difficult to monitor fairly, and honesty is

required from the budget holder

Budget allocations may be incorrect. Insufficient allocations restrict the activities of the company and can be de-motivating for staff.

Savings may be sought that are not in the interests of the firm. To keep within a budget a manager may make a cost cutting decision in the short-term which may lower the quality of the good produced and damage sales in the long term.

Changes may not be allowed for when a budget is reviewed.

Zero Budgeting A system of setting budgets where managers must justify

all of the money allocated to them to ensure it is not excessive.

Advantages

Encourages budget holders to plan carefully

Identifies changes in needs for a business. It avoids declining areas accumulating big budgets

It can save money

Disadvantages

Can be very time consuming

Skilled negotiators may be able to accumulate higher budgets when they may not be necessary

Variances

Differences between actual and budgeted figures

E.g. Budgeted advertising spending = £5,000,000 Actual spending = £6,000,000 Variance = £1,000,000

Favourable variance – when costs are lower than expected or sales are higher than expected

Adverse (unfavourable) Variance – Costs are higher or revenue is lower than expected

Adverse Variance

Student activity

Exam style question:

Sharrocks plc is a clothes retailer with 120 branches across the UK. The company has a reputation for selling highly

fashionable products. Examine the benefits the company might gain from delegating budgets

(8 marks)

Mark breakdown:Content Knowledge of theory (2 marks) Application Relating your answer to the case (1 mark)Analysis Using the correct theory and the appropriate

business language to fully develop the answer (3marks)

Evaluation Making a judgement based on arguments (2 marks)

Introduction with definition of budgets and why business set them. (AO 1: Knowledge)

Advantages of setting budgets with particular focus and examples from the company the question is focused upon

(AO 2: Application & AO 3: Analysis)

Disadvantages applied to the case(AO 2: Application & AO 3: Analysis)

Conclusion with a judgement which answers the question based on your arguments in the essay.

(AO 4: Evaluation)

Structure of essay

Possible answers could include a definition of a budget plus:

Advantages of delegating budgets

Motivating for staff as they are empowered and take ownership of decisions, better decision making as local managers are more knowledgeable of own store

it is a fashion store so tastes and fashions change so stores can set their own budgets accordingly, budget holders are accountable and mistakes can be easily

traced, success can be rewarded

Disadvantages of delegating budgets

Loss of control from senior management, requires honesty from budget holders, budget holders may not have sufficient skills, may lose consistency across the

firm and not work towards common goal of company

Answer

Case Study: And so this is Christmas

Read the case study and complete questions 1 -

4

(25 Marks: 30 Minutes)

Remember to use the assessment objectives to achieve FULL marks