M4-Analyse the reasons why costs need to be controlled to budget.
In my report I’m going to analyse the reasons why costs need to be controlled and why businesses set budgets as targets or limits. I am also going to use the figures from the income and expenditure for the business Hairliners and going to explain the reasons why Headliners needs to use a budget to control their costs.
Costs and budgets need to be controlled in order to know what is received and spend. For instance, if costs and budgets are not controlled when running a business, then it will run the risk of spending more money than it is taking or not spending enough money to grow the business and compete. The reason organisation needs to control their costs properly would be that it would end up saving money on expenses and increase its revenue. This will help the company to increase its revenues and this would allow the company to invest more money if required.
The business should control its costs so that it saves money and by having the right amount of stock the business can then have the full benefits of selling those stocks and receiving cash which could be used for other areas of the business or buy more stock if they are confident they can sell it all. A budget divides your expenses into overhead and production costs. Overhead costs are operating expenses such as phones, insurance, marketing and rent. If you don’t know your overhead and production costs for each unit of a product you produce you can’t set prices for your customers.
Variance analysis-Explaining the difference between actual costs and the sales revenue for the goods to be sold.
Favourable variances- a favourable variance occurs when the actual revenues are greater than the budgeted or standard revenues.
Adverse variances-Adverse revenue means the company earned less revenue than expected.
Monitoring variances is important