P6 Unit 2
Illustrate the use of budgets as a means of exercising financial control of a selected company.
In this section of the task, I will illustrate the use of budgets for my selected organisation; Domestic
Dog Homes.
Costs
Identifying the cost that business will incur allows a business to budget, there are two types of costs
and they both need to be identified and monitored. They are the following;
Fixed Costs are costs that do not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by an individual or organisation.
Fixed costs can be any of the following; rent, salary, insurance, salaries and many more.
Variable costs are costs that varies with the production output. Variable costs are those costs that
vary depending on an individuals or organisations production volume. As production increases,
variable costs are likely to increase vice versa. Examples of variable costs within a business are;
wages, running costs for e.g. electricity bills, suppliers and many more.
Budgeting
It is very important for an organisation to control its cost so that it can manage its financial resources
effectively. A budget is a fixed amount of finance that businesses will plan to use in a set period of
time, they plan it on their predications of what they think is going to happen to for them in the
future months/years. Budgets are used to project revenues and spending to help determine how
the organisation will achieve short term and long term strategy. Budgeting estimates revenues, plans
expenditures, and restricts spending that is not part of the plan. However, setting a budget can be
difficult for a business. A budget is based upon previous year’s data that has been collected and
stored over the years. The reason organisations need to control their costs properly would be that it
would end up saving money on expenses and increases its revenue.
There are two ways to issue a budget, they are the following;
Zero budgeting is when no budget is issued, in this case, different departments do not have a budget
and can spend as much as they want given they give a reasonable reason as to what they are
purchasing and are able to convince the manager.
Allocated budgeting is when each department is given an allocated budget and the department
have a set amount of money that they must use for a set period of time. The department has the
freedom of purchasing what they please.
Variance analysis is a key element of performance management and is the process by which the
total difference between the estimated and actual result is analysed. A variance arises when there is
a difference between actual and budget figures. Variances can be favourable or unfavourable. A
favourable variance means that costs were lower than expected in the budget or revenues were
higher than expected. An unfavourable variance might mean that costs were higher than expected
or revenue was lower than expected.
Below is a table of Domestic Dog Homes budget/actual figures for Last year for months October,
November and December. I will be using this table to show what variance analysis is.
Illustrate the use of budgets as a means of exercising financial control of a selected company.
In this section of the task, I will illustrate the use of budgets for my selected organisation; Domestic
Dog Homes.
Costs
Identifying the cost that business will incur allows a business to budget, there are two types of costs
and they both need to be identified and monitored. They are the following;
Fixed Costs are costs that do not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by an individual or organisation.
Fixed costs can be any of the following; rent, salary, insurance, salaries and many more.
Variable costs are costs that varies with the production output. Variable costs are those costs that
vary depending on an individuals or organisations production volume. As production increases,
variable costs are likely to increase vice versa. Examples of variable costs within a business are;
wages, running costs for e.g. electricity bills, suppliers and many more.
Budgeting
It is very important for an organisation to control its cost so that it can manage its financial resources
effectively. A budget is a fixed amount of finance that businesses will plan to use in a set period of
time, they plan it on their predications of what they think is going to happen to for them in the
future months/years. Budgets are used to project revenues and spending to help determine how
the organisation will achieve short term and long term strategy. Budgeting estimates revenues, plans
expenditures, and restricts spending that is not part of the plan. However, setting a budget can be
difficult for a business. A budget is based upon previous year’s data that has been collected and
stored over the years. The reason organisations need to control their costs properly would be that it
would end up saving money on expenses and increases its revenue.
There are two ways to issue a budget, they are the following;
Zero budgeting is when no budget is issued, in this case, different departments do not have a budget
and can spend as much as they want given they give a reasonable reason as to what they are
purchasing and are able to convince the manager.
Allocated budgeting is when each department is given an allocated budget and the department
have a set amount of money that they must use for a set period of time. The department has the
freedom of purchasing what they please.
Variance analysis is a key element of performance management and is the process by which the
total difference between the estimated and actual result is analysed. A variance arises when there is
a difference between actual and budget figures. Variances can be favourable or unfavourable. A
favourable variance means that costs were lower than expected in the budget or revenues were
higher than expected. An unfavourable variance might mean that costs were higher than expected
or revenue was lower than expected.
Below is a table of Domestic Dog Homes budget/actual figures for Last year for months October,
November and December. I will be using this table to show what variance analysis is.
