Question

Discuss the assumptions and predictions that are made during the budgeting process, specifically outlining two (2) that a company needs to consider when preparing the budget.(example)

Discuss under what circumstances a company should investigate budget variances AND discuss two (2) corrective actions that can be undertaken.( example)

Answer 1

Part-1) About assumption and prediction regarding budget-----According to Dictionary.com, an assumption is, "a thing that is accepted as true or as certain to happen, without proof." For both business and personal budgeting purposes, budget assumptions are expectations -- usually expected or presumed income and expenses. Making reasonable assumptions when creating a budget for the first time gives you starting numbers to work with for planning purposes.

A budget is a quantitative description of the planned objectives of the management of the Company and it reflects the intention of the management as to how the resources will be acquired and used to achieve the objectives. It is also a tool in the hands of the managers for proper planning and control of the use of scarce resources.

Certain assumptions are made regarding the operating conditions in order to make the budgeting process reliable. The assumptions relate mainly to the business environment in which the organization in operating.

outlining two that a company needs to consider when preparing the budget

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Example of Capital Budgeting-----

Capital budgeting involves future projects which overlap several or many future accounting periods. Capital budgeting usually means listing each project along with its cash outlays and expected cash inflows for each year. The amounts should be discounted to their present values and also ranked by priority and profitability.

part-2) circumstances of investigate budget variances-----

What Is a Budget Variance?

A budget variance is a periodic measure used by governments, corporations, or individuals to quantify the difference between budgeted and actual figures for a particular accounting category. A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls. Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy.

Budget variances can occur broadly due to either controlled or uncontrollable factors. For instance, a poorly planned budget and labor costs are controllable factors. Uncontrollable factors are often external and arise from occurrences outside the company, such as a natural disaster.

corrective action 1)

First and foremost – not all variances are bad things some can actually be good.

For budgeting purposes it is important to consider the budget variance in terms of how it has impacted profits:

1. POSITIVE VARIANCES – anything that boosts profits

• Better than expected result
• Costs lower than expected
• Revenue higher than expected

2. NEGATIVE VARIANCES – anything that reduces profit

• Worse than expected result
• Costs higher than expected
• Revenue lower than expected

Corrective action 2)---

FIND your variance – ask the question “WHERE is there a difference?”

Establishing where there is a variance is important and reviewing what has happened against both what you were hoping for, and what you have done before helps examine how your business is tracking and how accurate your planning is.

Variance analysis is most useful when you undertake a variety of comparisons:
A. Specific variances – actual figures v expected figures – this includes

• Actual v budget
• Actual v Forecast

It is unlikely that you will be perfect at budgeting (unless you have a crystal ball), so you are bound to get variances at least occasionally. Generally, small variances are simply part of doing business, large variances need investigating – but don’t get complacent; think of it like testing for lumps, or checking moles – you need to get a foundation of what is NORMALLY a bit over or a bit under before you can understand WHAT IS ODD… and this only comes with practice.

B. Trend variances – small, continual changes over time, that incrementally diverge from expected.

• this month’s v last month’s
• August 2010 v August 2011 – both acutals and budgets

What can seem normal, can seem so because we are used to it. Trend analysis is a bit like watching your weight; when you check your scales each day, it only seems like tiny changes, but if you look at this birthday compared to your weight last birthday that is when you notice the few extra kilos have snuck on … Trend analysis puts a spotlight on the changes that creep up on us little by little.