Conor Cunningham P5 M3 D2
Task 4
To; Management Team of Sophie’s Spring Water
From; Conor Cunningham
Date; 4th May 2017
P5
A budget is an agreed plan establishing, in numerical or financial terms, the policy to be
pursued and the anticipated outcomes of that policy.
Benefits of using budgets
They provide direction and coordination.
They can motivate staff.
They improve efficiency.
They encourage careful planning.
Drawbacks of using budgets
They are difficult to monitor fairly.
Allocations may be incorrect and unfair.
Savings may be sought that are not in the interests of the firm.
They may be inflexible
A good budget should be consistent with the aims of the business, be based on the opinions of
as many people as possible, set challenging but realistic targets, be monitored at regular
intervals and be flexible.
Variance analysis is the process by which the outcomes of budgets are examined and then
compared to the budgeted figures. The reasons for any differences (variances) are then found.
There are different types of variances;
Favourable variances – when costs are lower than expected or revenue is higher than
expected. Or if costs or revenue is the same than expected.
Adverse (unfavourable) variances – when costs are higher than expected or revenue is lower
than expected.
A variance is calculated by the following formula: Variance = budget figure – actual figure
For variance analysis, use ‘F’ for favourable variances and ‘A’ for adverse variances, rather than
positive or negative numbers. Knowing the effect a variance has on profit tells you whether it is
favourable or adverse. A favourable variance will mean more profit than expected. An adverse
variance will mean less profit than expected.
Task 4
To; Management Team of Sophie’s Spring Water
From; Conor Cunningham
Date; 4th May 2017
P5
A budget is an agreed plan establishing, in numerical or financial terms, the policy to be
pursued and the anticipated outcomes of that policy.
Benefits of using budgets
They provide direction and coordination.
They can motivate staff.
They improve efficiency.
They encourage careful planning.
Drawbacks of using budgets
They are difficult to monitor fairly.
Allocations may be incorrect and unfair.
Savings may be sought that are not in the interests of the firm.
They may be inflexible
A good budget should be consistent with the aims of the business, be based on the opinions of
as many people as possible, set challenging but realistic targets, be monitored at regular
intervals and be flexible.
Variance analysis is the process by which the outcomes of budgets are examined and then
compared to the budgeted figures. The reasons for any differences (variances) are then found.
There are different types of variances;
Favourable variances – when costs are lower than expected or revenue is higher than
expected. Or if costs or revenue is the same than expected.
Adverse (unfavourable) variances – when costs are higher than expected or revenue is lower
than expected.
A variance is calculated by the following formula: Variance = budget figure – actual figure
For variance analysis, use ‘F’ for favourable variances and ‘A’ for adverse variances, rather than
positive or negative numbers. Knowing the effect a variance has on profit tells you whether it is
favourable or adverse. A favourable variance will mean more profit than expected. An adverse
variance will mean less profit than expected.
