M4 UNIT 2- Analyse the reasons why costs need to be controlled to a budget. Give at least 4 examples of the negative effects of exceeding financial budgets and how it affects the business.
M4-Analyse the reasons why costs need to be controlled to a budget. Give at least 4 examples of the negative effects of exceeding financial budgets and how it affects the business.
Example of costs
Variances and whether they are adverse (A) or favourable(F) over the three months (Nov, Dec, Jan)
Identify the possible reasons for these variances
Materials
On budget
Petrol
20 Adverse
Petrol prices went up.
Wages
On budget
Advertising
150 Adverse
The person in control of advertising didn’t budget effectively and anticipated the prices wrong or they took out a marketing campaign that was substantially higher than they expected.
Insurance
300 Adverse
They could’ve renewed their insurance but if this is the case then they should’ve known how much the insurance was going to cost. Alternatively they could’ve had a claim within the 3 months.
Factory rental
20 Adverse
The landlord the company are renting their land from may have put up his rental prices or perhaps they slightly expanded their factory within the 3 months.
Bank loan payment
75 Adverse
The interest rate may have increased and they weren’t aware of this. Equally in previous months they could have paid less to the bank and therefore had to catch up during these 3 months and paid more.
Van Payment
60 Favourable
An adverse variance in petrol would arise the problem of trying to limit the amount you transport. They can do this by comparing the petrol prices of local petrol stations and then using the cheapest proven one. An adverse in advertising would cause a problem as the company may need to decrease how much they advertise, which could cause the business to become less known or they could limit their advertising to only market their product at prime times. In order to do this they could predominantly advertise their product before Christmas or if their product is predominantly seasonal then advertise it during peak times e.g. in summer or winter. A 300 adverse variance for
Example of costs
Variances and whether they are adverse (A) or favourable(F) over the three months (Nov, Dec, Jan)
Identify the possible reasons for these variances
Materials
On budget
Petrol
20 Adverse
Petrol prices went up.
Wages
On budget
Advertising
150 Adverse
The person in control of advertising didn’t budget effectively and anticipated the prices wrong or they took out a marketing campaign that was substantially higher than they expected.
Insurance
300 Adverse
They could’ve renewed their insurance but if this is the case then they should’ve known how much the insurance was going to cost. Alternatively they could’ve had a claim within the 3 months.
Factory rental
20 Adverse
The landlord the company are renting their land from may have put up his rental prices or perhaps they slightly expanded their factory within the 3 months.
Bank loan payment
75 Adverse
The interest rate may have increased and they weren’t aware of this. Equally in previous months they could have paid less to the bank and therefore had to catch up during these 3 months and paid more.
Van Payment
60 Favourable
An adverse variance in petrol would arise the problem of trying to limit the amount you transport. They can do this by comparing the petrol prices of local petrol stations and then using the cheapest proven one. An adverse in advertising would cause a problem as the company may need to decrease how much they advertise, which could cause the business to become less known or they could limit their advertising to only market their product at prime times. In order to do this they could predominantly advertise their product before Christmas or if their product is predominantly seasonal then advertise it during peak times e.g. in summer or winter. A 300 adverse variance for