2. What is a budget? A financial plan for the future concerning the revenues and costs of a business
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11. Illustration of Variances Sales of standard product are £15k higher than budget – this is a positive (favourable) variance Actual wages were £3k higher than budget – i.e. an adverse (negative) variance Overall, the profit variance was positive (favourable) – i.e. better than budget Item Budget Actual Variance Favourable £'000 £'000 £'000 or Adverse Sales revenue Standard product 75 90 15 F Premium product 30 25 -5 A Total sales revenue 105 115 10 F Costs Wages 35 38 3 A Rent 15 17 2 A Marketing 20 14 -6 F Other overheads 27 35 8 A Total costs 97 104 7 A Profit 8 11 3 F
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14. A point to remember An adverse variance might result from something that is good that has happened in the business... e.g. higher production costs than budget (adverse variance) that occur because sales are significantly higher than budget (favourable budget)
