Master Budgeting and Variance Analysis with this Organizational Quiz!

Budgeting and Variance Analysis in Organizations

• Budgets are financial plans that allow managers to plan the future finances of their organization and set targets for different parts of their organization.
• Budgets are particularly useful for larger organizations where senior managers delegate autonomy of control to different people in the organization.
• Budgets can come in three different parts: sales revenue budgets, expenditure budgets, and profit budgets.
• Variance analysis is a process of comparing budgeted figures with actual performance figures to calculate the difference or variance.
• Favorable variances occur when actual figures are higher than budgeted figures for sales revenue, while adverse variances occur when actual figures are lower than budgeted figures for sales revenue.
• For expenditure budgets, favorable variances occur when actual figures are lower than budgeted figures, while adverse variances occur when actual figures are higher than budgeted figures.
• Profit budgets are the difference between sales revenue budgets and expenditure budgets.
• The budgetary process allows organizations to dissect where different areas of the business might have underperformed and try to improve performance.
• Inaccurate budgetary targets can be demotivational for people responsible for achieving or sticking within those targets.
• A limitation of budgeting is that it can encourage overspending in the organization, as departments may spend their full allocated budget out of fear that it might be reduced in the next budgetary cycle.
• Accuracy of budgeting is important, as inaccurate budget targets can reveal limitations in the budgeting process and prevent organizations from achieving their full potential.
• Variance analysis is a crucial tool for managers to identify areas of the business that need improvement and make necessary changes to improve performance.