Business – 5.5 Budgets – Meaning and purpose of budgets | e-Consult
5.5 Budgets – Meaning and purpose of budgets (1 questions)
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Calculations
| Item | Amount (£) |
| Sales revenue (10,000 × 25) | 250,000 |
| Variable costs (10,000 × 15) | 150,000 |
| Contribution margin | 100,000 |
| Fixed overheads | 30,000 |
| Profit | 70,000 |
Use of variance analysis
- Sales variance: Compare actual sales revenue with the budgeted £250,000 to identify price or volume differences.
- Variable cost variance: Analyse the difference between actual variable cost per unit and the budgeted £15 to spot efficiency issues.
- Fixed overhead variance: Examine any over‑ or under‑absorption of fixed costs, indicating whether overheads were controlled.
- By attributing each variance to specific causes (e.g., market conditions, production efficiency), management can take targeted corrective actions and improve future budgeting accuracy.