BUDGET DEVIATION

ANALYSIS

Introduction
 WHAT IS BUDGET?

 Budget is an operational plan, for a definite

period usually a year . Expressed in
financial terms and based on the expected
income and expenditure.

 Budget is a concrete precise picture of the total

operation of an enterprise in monetary terms.
 PURPOSE OF BUDGETING
 Mechanism for translating fiscal objectives
into projected monthly spending pattern.
 Enhances fiscal planning and decision making.
 Clearly recognises controllable and
uncontrollable cost areas.
 Offers a useful format for communicating
fiscal objectives.
 Allows feedback of utilization of budget.
 Helps to identify problem areas and facilitates effective
solution.
 Provides means for measuring and recording
financial success with objectives of organization.
 BUDGET VARIANCE

 A firm's operating budget, for

instance, may forecast spending
for "Employee Training." The
annual spending figure is set
first, for high-level planning.
Later, the firm will break down
the yearly figure into monthly or
quarterly data.
 FORMULA OF BUDGET
VARIANCE

1. VARIANCE= ACTUAL SPENDING – BUDGET

SPENDING
2. VARIANCE= BUDGET SPENDING – ACTUAL
SPENDING
 RESPONDING TO BUDGET
VARIANCE
•Adjust the forecast to reflect the new
reality.
This response is known as flexible
budgeting.
•Control actual spending in the future, to
bring the annual variance closer to zero.
BUDGET HIERARCHY
 BUDGET HIERARCHY

•Many firms plan the capital budget on a

company-wide basis, choosing not to
specify individual department budgets
further. Budget items for the high-
level capital budget may nevertheless
appear in categories. And, these may
represent significant components of the
firm's asset structure, such as "Inventory
purchase.
 CAPITAL BUDGET VS
OPERATING BUDGET

•Two major kinds of plans usually stand at the top of

the budget hierarchy. One is the budget for capital
expenses or CAPEX. The second is the budget for
operating expense or OPEX. Note that CAPEX and
OPEX do not overlap. They handle entirely different
spending items. Moreover, firms create capital and
operating budgets through various processes,
involving different managers.
Analyzing the difference
between Capital
Expenditure & Operational
Expenditure
DE ASIS, ELIZA BIEL V.
What is operational expenditure?

Operational expenditure (or OpEx) is the money a business spends on a regular,

ongoing basis to run its daily operations. Since operating expenses make up the bulk
of the day-to-day expenses, businesses try to minimize these costs with careful
planning and management

Examples of operational expenditures

• Office rent
• Utilities
• Internet
• Inventory – Costs of Goods Sold
• Salaries
 Capital expenditure definition

Capital Expenditure (or CapEx) refers to the funds used by a business to acquire,
maintain, and upgrade fixed assets.

Capital Expenditure Examples

• Office buildings, including the costs that extend the life
of the building
• Office equipment like computers, photocopiers,
furniture
• Vehicles
• Patents, licenses, trademarks, copyrights
Here are the differences between Capital
Expenditure and Operational Expenditure
How to account for CapEx vs OpEx

Capital expenditures are not fully deducted in the accounting period they were
incurred in, but rather depreciated to spread the cost over the useful life of the
asset. Every year, a part of the asset is “used up”.

Utilities, rent, salaries, and other business expenses are listed under the
“Operational Expenses” section in the Income Statement. Operating expenses
are tax-deductible for the accounting period they were incurred in, while capital
purchases are not.
CapEx vs OpEx:
How to choose the right model
There are some cases when it makes more sense to go for CapEx. Purchasing and owning
capital assets can boost the financial strength of any business. Apart from the high initial cost,
you don’t continue paying for it.

However, capital expenses can’t be undone without the business incurring heavy losses. If
your business anticipates quick growth or technological changes, OpEx would naturally be a
better choice. Further, here are some reasons businesses opt for OpEx:

• The high initial cost of the fixed assets warrants careful budgeting and accurate forecasts
• Once you own the asset, you’re stuck with it for a long time, in order to extend its ROI.
Frequent technological changes and estimating future requirement make it tricky and
complicated
Cash Budget

A cash budget is an estimation of the cash flows for a business over a

specific period of time. This budget is used to assess whether the entity has
sufficient cash to operate.

How a Cash Budget Works

Companies use sales and production forecasts to create a cash budget, along with
assumptions about necessary spending and accounts receivable collections. A cash budget is
necessary to assess whether a company will have enough cash to continue operations. If a
company does not have enough liquidity to operate, it must raise more capital by issuing
stock or taking on more debt.
Example of the Cash Budget
The example shows that an
inordinately large dividend
payment in the second week of
the cash budget, coupled with a
large asset purchase in the
following week, places the
company in a negative cash
position. Thus, it may be wiser
for the company to consider a
small dividend payment and
avoid a negative cash position.
THANK YOU !!
 The
Budgeting
Process
By:Delgado, Efren
Jr. G.
How Process Works in the
Budget Planning Cycle
In the period between the
issuance of one budget and the
next, planning-related decisions
and activities make up
the budget cycle or process. In
large entities, the process
extends typically across months,
if not the entire period between
budgets.
 Steps in the Budget Process

• Assessing variances between actual and budgeted

figures in the previous period's plan.
• Identifying and then prioritizing business needs and
objectives for the forthcoming period.
• Forecasting and evaluating
• Ensuring
• Packaging and communicating funding
requests to those responsible for reviewing and
approving budget proposals.
 Zero-Based
Budgeting
How Does Zero Base Budgeting
Differ From Incremental Budgeting?

Zero-based budgeting is an approach

requiring justification for every expenditure. In
other words, each spending item starts with a
budget value of 0. And, those requesting funds
must justify all changes above 0. This
requirement contrasts with the more usual
practice, incremental budgeting. Under this
method, each spending item starts at last
term's level. And, the next term's budget is
an increment to that level (positive or negative
change).
Budget
Variance
Analysis
 What is Budget Variance Analysis?

variance is a signal that

revenues or spending did not go
according to plan. If the
variation represents
overspending, moreover, it is
warning there may be problems
paying future expenses.
 Sign Conventions in Variance Analysis
Confusion sometimes arises in variance
analysis because two different conventions
for calculations commonly used.

Convention 1

Incoming revenue variance = Actual – Forecast

Expense spending variance = Actual – Forecast

Convention 2

Incoming revenue variance = Actual – Forecast

Expense spending variance = Forecast – Actual