Unit 2
M4: analyse the reasons why costs need to be controlled to budget.
In this task I will show an awareness of the problems that can arise if costs are not controlled to
budget. This can be demonstrated by looking at a given scenario and breaking down the various
elements of the budget to determine why it is overspent and by identifying the problems that this
will create for the selected organisation.
The organisation I have selected to analyse is Domestic Dog Homes. I will talk about why costs and
budgets need to be controlled within this business and also the advantages/disadvantages of
controlling costs and budgets.
In order for a business to manage its financial resources effectively, it must control its costs. This is
because if they control their costs properly, they would result in reducing expense as well as
increasing revenue. Revenue is increased and allows businesses to re-invest more profits into the
business. Businesses would reduce expense by only ordering the correct quantity of stock, if too
much stock is ordered, expense would be high and chances are businesses may not make money on
these products. Also, with the right quantity purchased, they will have enough capital to improve
other areas of the business.
Budgets can be divided into sub-classes: Capital budgets and Operating budgets. Capital budget is a
step by step process that businesses would use to determining the outcome of an investment
project. The managers make the final decisions as to whether they accept or deny any investment
project. Capital budgets are directed towards expenditure for new projects and often require special
financing. It is opted for achieving short-term operational goals of the organisation.
Why it’s crucial for a business to control its budget
It’s crucial for a business to control its budgets because budgets help business owners determine
whether they have enough money to raise the business as well as keep it surviving. If an
organisation has set a budget, it would be safer as they would have equal finance for different
periods. Budgets will help businesses reach its targets and goals. If a business does not manage their
costs due to an unallocated budget, they would struggle in achieving their aims and objectives as
different departments have the freedom of purchasing and expenses would be too high. If costs are
left unmonitored, the amount spent on expenses will be too much and this will overall decrease
profits.
Over-expenditure
Over-Expenditure occurs when a business exceeds its budgeted amount – exceeding their
prediction. I will explain how Domestic Dog Homes had exceeded their budget based on their
prediction below.
Cost Oct Oct Nov Nov Dec Dec
Budget Actual Budget Actual Budget Actual
Materials 300 200 300 300 200 250
Wages 800 800 800 800 800 800
Advertising 200 250 200 250 200 250
Insurance 300 400 300 400 300 400
Van Maintenance and fuel 400 500 400 600 400 600
Total 2000 2150 2000 2350 1900 2300
M4: analyse the reasons why costs need to be controlled to budget.
In this task I will show an awareness of the problems that can arise if costs are not controlled to
budget. This can be demonstrated by looking at a given scenario and breaking down the various
elements of the budget to determine why it is overspent and by identifying the problems that this
will create for the selected organisation.
The organisation I have selected to analyse is Domestic Dog Homes. I will talk about why costs and
budgets need to be controlled within this business and also the advantages/disadvantages of
controlling costs and budgets.
In order for a business to manage its financial resources effectively, it must control its costs. This is
because if they control their costs properly, they would result in reducing expense as well as
increasing revenue. Revenue is increased and allows businesses to re-invest more profits into the
business. Businesses would reduce expense by only ordering the correct quantity of stock, if too
much stock is ordered, expense would be high and chances are businesses may not make money on
these products. Also, with the right quantity purchased, they will have enough capital to improve
other areas of the business.
Budgets can be divided into sub-classes: Capital budgets and Operating budgets. Capital budget is a
step by step process that businesses would use to determining the outcome of an investment
project. The managers make the final decisions as to whether they accept or deny any investment
project. Capital budgets are directed towards expenditure for new projects and often require special
financing. It is opted for achieving short-term operational goals of the organisation.
Why it’s crucial for a business to control its budget
It’s crucial for a business to control its budgets because budgets help business owners determine
whether they have enough money to raise the business as well as keep it surviving. If an
organisation has set a budget, it would be safer as they would have equal finance for different
periods. Budgets will help businesses reach its targets and goals. If a business does not manage their
costs due to an unallocated budget, they would struggle in achieving their aims and objectives as
different departments have the freedom of purchasing and expenses would be too high. If costs are
left unmonitored, the amount spent on expenses will be too much and this will overall decrease
profits.
Over-expenditure
Over-Expenditure occurs when a business exceeds its budgeted amount – exceeding their
prediction. I will explain how Domestic Dog Homes had exceeded their budget based on their
prediction below.
Cost Oct Oct Nov Nov Dec Dec
Budget Actual Budget Actual Budget Actual
Materials 300 200 300 300 200 250
Wages 800 800 800 800 800 800
Advertising 200 250 200 250 200 250
Insurance 300 400 300 400 300 400
Van Maintenance and fuel 400 500 400 600 400 600
Total 2000 2150 2000 2350 1900 2300
