Budgets
Budgets
- A budget is a financial plan for the future — a target for income or spending.
- Budgets help a firm plan, control money, and check performance.
- incremental budget — last year's budget changed a little.
- zero-based budget — every cost justified from zero each year.
Practice
A zero-based budget requires that:
Zero-based budgeting justifies every cost from scratch; incremental tweaks last year's figures.
Variances
$$\text{variance} = \text{actual figure} - \text{budgeted figure}$$
- favourable variance — better for profit (costs lower, or revenue higher, than planned).
- adverse variance — worse for profit (costs higher, or revenue lower).
- Studying variances shows managers where the plan went wrong.
Practice
A favourable variance means:
Favourable = better for profit (lower costs or higher revenue); adverse = worse for profit.
Practice
If actual costs are LOWER than the budgeted costs, the variance is:
Lower costs than planned help profit, so the variance is favourable.
You've got it
Key idea
- a budget is a financial plan/target; incremental (tweak last year) vs zero-based (justify from zero)
- variance = actual − budgeted
- favourable = better for profit; adverse = worse for profit