Notes for 3.9.4 Importance of Budgets and Variances in Decision-Making - IB | RevisionDojo
3.9.4 Importance of Budgets and Variances in Decision-Making Notes
Budgets and Variances Are Tools for Financial Planning and Control
Budgets ultimately provide businesses with a clear direction.
But even the best-laid budgets don’t always go as planned.
Unexpected changes in sales, material costs, or economic conditions can cause differences between budgeted figures and actual results, which is where variance analysis comes in.
A well-structured budget allows businesses to anticipate financial challenges before they happen.
Benefits of Using Budgets and Variance Analysis
1. Planning & Forecasting
Budgets help businesses set realistic financial goals and anticipate future challenges.
Managers can:
Identify potential cost overruns early.
Set revenue targets based on market analysis.
Align business strategies with financial capabilities.
Tip
Always start with the income budget.
Knowing expected sales helps align production and expenses.
2. Cost Control & Efficiency
Tracking variances ensures businesses don’t overspend and helps them identify areas for cost-cutting without sacrificing quality.
If expenses are consistently higher than budgeted, managers must investigate the cause.
If costs are lower than expected, the business may have an opportunity to reinvest savings.
3. Performance Evaluation
Variance analysis helps managers evaluate the effectiveness of financial planning:
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Questions
Recap questions
1 of 5
Question 1
Recap question
In a particular quarter, a company reports a positive sales variance (actual sales above target) but a negative cost variance (actual costs above budget). What is the most appropriate managerial focus based on these variances?
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Note
Benefits of Budgets and Variance Analysis
Planning and Forecasting
Budgets help businesses set realistic financial goals and anticipate future challenges.
Managers can:
Identify potential cost overruns early.
Set revenue targets based on market analysis.
Align business strategies with financial capabilities.
TipAlways start with the income budget. Knowing expected sales helps align production and expenses.ExampleA retail store uses past sales data to budget for the holiday season, allowing them to stock inventory accordingly.
