Ib Business Case Study 2013 Analysis Of Variance

Presentation on theme: "IB Business and Management 3.4 Budgeting. Learning Outcomes To be able to explain the importance of budgeting for organisations Calculate and interpret."— Presentation transcript:

1 IB Business and Management 3.4 Budgeting

2 Learning Outcomes To be able to explain the importance of budgeting for organisations Calculate and interpret variances Analyse the role of budgets and variances in strategic planning

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 BENEFITS OF BUDGETING What would the benefits of creating a budget be?

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 StaffingRaw Materials TrainingContingency 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 APPROACHES TO BUDGETING How are budgets set?

13 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?

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

15 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?

16 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

17 PRE-BUDGETING RESEARCH What information would managers need to know before they can set budgets for the following year?

18 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

19 Other considerations Available finance Company objectives Planned purchases Negotiation process

20 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


22 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

23 Budgeting – An ongoing process

24 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.

25 Example Budget - January BudgetedActualVariance F/A F/A Sales5,0005,020 Stock1,0501,060 Wages1,4001,370 Salaries400410 Power200200 Profit1,9501,980 20Favourable 10Unfavourable 30Favourable 10Unfavourable 0 30Favourable

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

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

28 More money has been spent of stock than budgeted for

29 Wage costs are lower than budgeted figures

30 Sales figures are lower than budget

31 Task Complete the worksheet Edex 6 Budgets and Variances


33 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?

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

35 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?

36 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

37 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?

Finance and Accounts

Keeping a close eye on and having effective systems to monitor inflows of revenue and outflows of expenditure is vital for any successful business. Having established sources of finances for initial business funding, cash short-falls and expansion plans is important. The accounts and finance section also provides the business with an array of tools for keeping track of cash flows, judging the viability of an investment and being able to prepare and analyse a financial records to both report on and evaluate the health of a business.

IB Business Management: 
UNit 3 - Finance and Accounts

Finance and Accounts in IB Business Management is one of the five core topics and is assessed in both Paper 1 and Paper 2 SL and HL examinations. Finance is the management of money, credit, banking and investments. Accounting is the preparation of business accounts such as trading , profit and loss  and balance sheets.

ENRON: An introduction to accounts & finance

Before Lehman Brothers sank link a stone and heralded the start of the Great Financial Crisis, ENRON was the prime example of financial and accounting mismanagement, leading to what was then the largest corporate bankruptcy in the history of corporations.

The documentary is a fascinating introduction to the world of accounts and finance, enjoy!

The biggest ever corporate bankruptcy

FInance and Accounts

The IB Business Management course Finance and Accounts topic aims to give the student a good overview of:
  • The need for finance in business and how finances can be sourced both internally and externally, from a variety of different short, medium, and long-term sources
  • The different ways investments can be analysed and judged, including: pay back periods, accounting rates of return, discounted cash flows and net present value, besides other qualitative considerations
  • The importance of working capital and the difference between cash and profit, examining cash flow forecasts and cash flow problems, as well as ways to to deal with liquidity problems
  • Why it is important for businesses to set and monitor budgets, and examine budget variances
  • Final accounts, including trading and profit and loss accounts, balance sheets, methods of calculating depreciation of assets and the different ways of valuing stock
  • The different types of ratios that are available to give an indication of a firm's financial health, including: profitability, liquidity, efficiency and gearing ratios


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