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EXAM PRACTICE 3.9.1

ADL is a television company in Argentina. ADL produces and broadcasts a range of
programmes and operates three satellite channels. It is particularly noted for producing
documentaries and popular drama series. The market for making and broadcasting
television programmes is growing rapidly in Argentina and other Spanish-speaking
countries, although rates of growth vary widely over time. Last year’s growth in sales
was 11.5 per cent, while the year before the figure was just 2.9 per cent.
The company’s managers have just been reviewing its financial performance, including
analysing its performance against budgets. Some of the data they considered is shown
in Table 3.9.8 below.
Table 3.9.8 ADL’s budget
Budget ($m) Actual ($m) Variance
Sales revenue 3,347.8 3,999.4

Labour costs 1,552.2 1,840.3 288.1 A

Materials costs 205.7 201.6 4.1 F
Other costs 630.1 916.6 286.5 A
Rent 597.0 602.4 5.4 A
Total expenses 2,985.0 3,560.9
Net income 362.8 438.5

One of ADL’s managers said that she believed that this budgetary data would help
with future decision-making.
1 Calculate the variances for the company’s total sales revenue and total expenses
and net income, stating whether each is adverse or favourable. [6]
2 Explain two ways in which the information in ADL’s budget might help its
managers with their decision-making. [6]

Controlling and monitoring a business

Budgets are an effective way of ensuring that a business does not spend more than it should. As long
as every employee ensures that their decisions mean that they do not spend in excess of their budget,
costs should not get out of control. Equally, if those involved in sales meet their targets then the
business should earn its planned level of profit. This should help the business achieve its objectives.
Managers may also take decisions based on the actual data in budgets through the calculation
of variances. If, for example, sales budgets show substantial adverse variances, managers may
question the quality of their products or their approach to pricing as well as the accuracy of the
market research they undertook. Similarly, managers will respond to expenditure budgets that TOK
show significant variances – adverse or favourable.
What assumptions
Businesses use budgets to assess the viability of new projects such as launching a new product or underlie the
relocating to a new region or country. In this case the research process involved in preparing the techniques used
necessary budgets is helpful and the final budget figures are likely to have a major influence on a when budgeting?
final decision by senior managers.

Decision-making and variances

A business that is faced with adverse variances may need to take some decisions to try to improve its
financial performance. However, as we shall see later in this section, this is not always the case.
Figure 3.9.3 below shows a number of possible decisions that managers might take in response to
the calculation of adverse variances. There are many other possible decisions, these are just some
examples.

3.9 Budgets (HL only) 373