Budgets

What would you do?

Mei Po runs a small artisan shop that makes decorations and gifts for the Chinese New Year. Unique hand-crafted touches and a great word-of-mouth reputation keep her products in high demand.

Recently, Mei Po learned that the space next door was available to lease. The timing was right as she was looking to expand her business. But as she reviewed the loan application, she noticed that in addition to a business plan, she needed to prepare a one-year budget. Mei Po was taken aback.

She planned her cash-flow month to month. How could she predict what would happen over the period of a year? It seemed impossible.

What would you do?

The first step in developing a budget is to establish a set of assumptions about the future. Questions Mei Po might ask include: Will the demand for her gifts grow over the next year? If yes, by how much?

The next step is for Mei Po to calculate expected revenues and expenses based on past performance and future expectations. The difference between revenues and expenses is net income. If Mei Po is satisfied with the numbers, she can finalize her budget. If she wants higher net income, she needs to identify new strategies that will support different assumptions.

In this topic, you'll learn how to identify and create a budget that will most effectively help you meet your business goals and how to use communication skills to develop realistic, accurate budgets that keep your organization on track.

What is budgeting?

A budget is the financial blueprint or action plan for an organization. It translates strategic plans into measurable expenditures and anticipated returns over a certain period of time.

Budgeting is the process of creating and fine-tuning budgets. Budgeting activities include:

Forecasting future business results, such as sales volume, revenues, capital investments, and expenses

? Reconciling those forecasts to organizational goals and financial

constraints

? Obtaining organizational support for the proposed budget ? Managing subsequent business activities to achieve budgeted

results

?

If you have profit and loss responsibility, the financial results of your division or business unit versus the budget may be a key factor in evaluating your job performance, and may also be tied to your compensation.

An understanding of the basics of budgeting and the budget process is, therefore, essential to creating realistic budgets that will later serve as performance benchmarks. Moreover, if you are skilled at \budget\within your organization and negotiating compromises during the budgeting process, you will be more likely to see your budget requests met.

Key Idea

The budgeting process involves establishing goals, evaluating different ways of achieving these goals, and assessing the financial impacts of these strategies.

There are typically four components in the budget process.

1. Setting goals. Some organizations mandate company wide goals such as \net profits by 10% during the next year.\Individual departments then translate these directives into financial goals that are relevant for their particular activities. For example, the sales department might set a goal of increasing revenues,while the purchasing department will look for ways to reduce costs.

2. Evaluating and choosing options. Several tactics may be used to meet a specific goal. You will need to consider which tactics are likely to be most effective in your particular situation and will also be supported across the organization.

3. Identifying budget impacts. Decisions about strategic goals and tactics are used to develop assumptions about future costs and revenues. For example, upgrading your advertising to reach more markets might mean that you need to hire professional marketing consultants.

4. Coordinating departmental budgets. Individual unit and division budgets are combined into a single master budget that expresses the organization's overall financial objectives and strategic goals. Typically, budgeting is an iterative process in which different groups prepare preliminary budgets, and then come together to identify and resolve differences.

Evaluating management's performance

Budgets can provide essential tools for measuring management performance. By comparing the actual results to the budget over a period of time, an evaluator can determine a manager's overall success in achieving his or her department's strategic goals.

Because actual results may differ from budgeted results due to reasons beyond an individual manager's control—such as an overall downturn in the economic cycle or an unexpected spike in prices of raw

materials—performance evaluations should be matched to appropriate measures of results.

Some financial measures of performance include:

?

Gross margin measures profitability after direct production costs but before other costs that are not specifically tied to production, such as marketing, administrative, and interest expenses. Gross margin = $40,000/$120,000 = 33%

?

SG&A (selling, general, and administrative costs) as a percentage of sales is a measure of an organization's effectiveness in controlling costs.

SG&A as a percentage of sales = $20,000/$120,000 = 16.7%

?

Revenue per employee is a measure of the operational efficiency of an organization, relative to other companies in the same industry. Revenue per employee = $120,000,000/225 = $533,333

Personal Insight

Almost everything involves a number with a distribution. So, there's an average, there's a measure of risk about the number and almost all things we deal with are constructs. The bottom line of a company's balance sheet doesn't actually mean very much: you could produce six other balance sheets which mean every bit as much—six other versions of profit. It doesn't matter what one says about numbers, you can't do without them; but what you can do is find out about the surrounding circumstances, which tell you about the risks attached to the numbers and you can do quite a lot that way.

Never fall for averages; it doesn't matter what average you choose—there are half a dozen different averages you can use—they are all misleading. What you need to know is the range of risk above the average; it's a difficult thing to do.

One thing you can always do is ask: \how would this number look if things were really different?\with key numbers—even if you do it informally—you should always do that

Sir Peter Middleton Barclays Group

Sir Peter Middleton enjoyed a long and distinguished career in HM Treasury spanning 30 years, ultimately ascending to become Permanent Secretary from 1983 to 1991. He spent the next 13 years with Barclays as Group Deputy Chairman and Executive Chairman of its investment bank, BZW. In 1997 he became Chairman of Barclays Capital. In May 1998 he relinquished his executive responsibilities, but remained a Non-Executive Director of Barclays and Barclays Bank. Later that year he resumed the helm following the unexpected resignation of the Chief Executive.

He was then appointed Group Chairman in April 1999, and in October stepped down as Group Chief Executive following the appointment of Matthew Barrett. He left Barclays in late 2004.

Sir Peter Middleton took on the Chairmanship of Camelot, the operator of The National Lottery, in September 2004.

He is also Deputy Chairman of United Utilities, and is on the Board of the National Institute of Economic and Social Research.

Setting assumptions

Unless we find some way to keep our sights on tomorrow, we cannot expect to be in touch with today.–Dean Rusk

All budgeting requires making assumptions about the future. In many companies senior management will communicate key assumptions that are to be used throughout the

organization—such as a 5% increase in salaries, or a 10% increase in sales volumes. In other cases the assumptions are specific to an individual department's activities.

Managers use a wide variety of data and approaches in developing assumptions, including historical trends, purchasing surveys, and industry projections. They also communicate with each other about their expectations for customer response, supplier performance, financial market fluctuation, and so on. Be sure to document all of your assumptions and keep notes of sources of information you use.

Beware of optimistic forecasts

Be aware that any forecast for the future will be optimistic; and the further into the future the forecast, the more optimistic it will be. As forecasts can be enormously important, treat them with as much realism as possible because people are natural optimists and this is likely to be reflected in the numbers. David Michels

Former Group Chief Executive, Hilton Group

In 1981 David Michels joined Ladbroke Group as Sales and Marketing Director of Ladbroke Hotels. He then became Managing Director of

Ladbrokes' Leisure Division in 1983, followed by Managing Director of Ladbroke Hotels in 1985.

He spent 15 years with Grand Metropolitan, mainly in sales and marketing, which culminated in a Board position as Worldwide Marketing Director. Following Ladbroke Group's acquisition of Hilton International in 1987, David Michels became Hilton's Senior Vice President, Sales and Marketing. In 1989 he moved up to become Deputy Chairman of Hilton UK, and Executive Vice President, Hilton International.

He joined Stakis as Chief Executive in 1991. Eight years later the company was acquired by Hilton Group for around ￡1.2 billion.

He joined Hilton International as Chief Executive in April 1999 and became Group Chief Executive of the Hilton Group (formerly Ladbroke Group) in June 2000. He left the company in 2006.

David Michels is also a Non-executive Director of British Land Company, easyJet and Marks & Spencer.

Preparing an Operating Budget—Forecasting Sales and Revenues

Key Idea

Sales projections for a given period are developed by product or product group. If you are forecasting product sales, consider whether it is appropriate to base your forecasts on current sales trends. Some factors to consider, in addition to overall demand trends for these types of products, are:

? ?

The history of sales growth for your company's products Competitive products that have or may be introduced in the market

? ? ? ?

Availability of substitute products Price sensitivity of purchasers

Percentage of purchasers who demonstrate repeat purchases Planned changes in sales and promotion activities

Historical data and run rates

If historical sales data is used as a base for forecasts, determine whether it is appropriate to use annual data or the run rate.

The run rate is the extrapolation of current financial results out over a future period of time. For example, if December's sales are $75,000, the annual run rate ($75,000 multiplied by 12 months) is $900,000.

Annual data may be most appropriate for forecasting one-off product sales, while the run rate may be better if you are forecasting revenues for services sold under long-term contracts, or for recently launched products.

Using the run rate

In the example below, the company sells products and also sells monthly services under long-term contracts. Table 1 shows projected sales for Year 2 using the run rate from Year 1. Table 2 shows projected sales for Year 2 assuming a 10% increase over total sales from Year 1.

Table 1: Forecasting Revenues Using the Run Rate for Product and Contract

Sales

Dec. Year 1 Year 2 Total Projected Sales @ Dec.

sales Year 1 run rate

Product sales $75,000 $900,000 Contract monthly services sales: Client A $4,000 $48,000 (added Jan. Year 1) Client B $4,000 (added Apr. Year 1) Client C $6,000 (added Oct. Year 1) Client D $9,000 (added Dec. Year 1) Subtotal contract services sales: Total revenue:

$48,000

$72,000

$108,000

$23,000 $98,000

$276,000 $1,176,000

Table 2: Forecasting Revenues at 110% of Total Year 1 Product and Contract

Sales

Year 1 total Year 2 Total Projected Sales @ 110%

sales of Year 1 total sales

Product sales $878,000 $965,800 Contract monthly services sales: Client A $48,000 $52,800 (added Jan. Year 1) Client B $36,000 (added Apr. Year 1) Client C $18,000 (added Oct. Year 1) Client D $9,000 (added Dec. Year 1) Subtotal contract $111,000 services sales: Total revenue: $939,000

$39,600

$19,800

$9,900

$122,100 $1,087,900

For products, this example assumes sales are fairly evenly distributed over the course of Year 1, so there is little difference between the two approaches ($900,000 versus $965,800). However, if product sales were concentrated in only a few months of the year, using the run rate would grossly over- or underestimate product revenues for Year 2.

Projections for contract services in the example are more realistic when the run rate is used ($276,000) because many new contracts signed in Year 1 were signed late in the year. Using annual data for contract services results in a very conservative estimate ($122,100) for Year 2. The most realistic revenue forecast for this company, and the revenue figure that will be used in subsequent examples, is $1,241,800. This amount is based on 110% of Year 1 product sales, plus the Dec. run rate for contract services.

Documenting revenue forecasts

Historical data, existing order backlogs, and information about the sales pipeline can be helpful in estimating how new sales volume might be distributed during the budget period. If necessary, create a monthly schedule to clarify how sales volumes and revenues are expected to fluctuate during the year. Doing so will help prevent overly optimistic forecasts. Since revenues are a function of units sold and price, you will want to document quantity and price assumptions used in developing the revenue forecast. Be aware that production constraints may affect the revenue budget. If, for example, sales demand is expected to exceed capacity, then the revenue budget is adjusted to match the production constraints rather than the actual demands of the market.

Be prepared to defend your assumptions, especially if you are also evaluated based on achieving budgeted revenue targets.

Preparing an Operating Budget—Cost of Goods Sold, SG&A, and Operating Income

Example of cost of goods sold forecast

In estimating line item expenses, be aware of break-points in production capacity that signal the need for additional outlays. For example, if you currently need 3 people to produce 10,000 orders a month, and you estimate that during the next year sales will increase by 20% to 12,000, at what point will you need to add additional staff to handle the extra volume?

Cost of Goods Sold: Year 2 Budget

Actual Year 2 Budget Rate of Change

Year 1

Cost of goods sold:

Direct labor $192,325 $256,500 Overhead $6,755 $7,200 Direct materials $111,000 $119,000 Total cost of goods sold $310,080 $382,700

33.4%

7.0% 7.2% 23.4%

Estimating SG&A

Selling, general, and administrative costs can include costs generated by research and development, product design, marketing, distribution, customer service, commissions, administration, and overhead. In the example below, only marketing and administrative expenses make up the SG&A budget.

SG&A: Year 2 Budget

Actual Year 2 Rate of Change

Year 1 Budget

Sales, general, and administrative costs: Sales salaries $220,000 $291,200 32.4% Advertising expenses $45,000 $51,000 13.3% Miscellaneous selling expenses $4,200 $3,900 (7.1%) Office expenses $92,000 $94,500 2.7% Total SG&A $361,200 $440,600 22.0%

Calculating expected operating income

Finally, the budgeted income statement can be calculated. The difference between expected sales and expected costs is the expected operating income.

Operating Income: Year 2 Budget

Actual Year 2 Rate of Change

Year 1 Budget

Operating income: Total revenue $939,000 $1,241,800 32.2% Cost of goods sold $310,080 $382,700 23.4% SG&A $361,200 $440,600 22.0% Total costs $92,000 $94,500 22.6% Total Operating Income $671,280 $823,300 56.3%

Typically, it will be necessary to rework the first draft of an operating budget in order to bring the budgeted results into line with goals and constraints. Testing different scenarios is the \process of budgeting. How will a change in one area affect the expected outcome? What if we increase advertising? How much would that increase sales? What if employees decide to go on strike? How can we incorporate that risk into the budget?

In the sample budget summarized under Operating Income, contract service sales resulted in a significant jump in anticipated sales revenues in Year 2. However, sales salaries and direct labor costs rose in proportion—the projected growth in operating income is largely due to the assumption that overhead and direct materials costs would not be affected by the increase in contract sales.

Preparing a capital budget

A capital budget is a schedule that shows planned investments in property, equipment, improvements, and other capital assets over a period of time. These outlays are different from ordinary day-to-day expenses in that they can be capitalized under accepted accounting practices. Instead of having to record the entire expense as a deduction from income in one accounting period, the capitalized expense is spread out over a period of years. Each year, a portion of the capitalized expense is recorded as depreciation. If you are asked to submit a capital budget request, you will need to estimate the total expenditure associated with each type of investment. For example, you might have one line item for computers, one for office equipment, and another for furniture. Your budget should also include amounts for related costs such as installation charges, consulting fees, the cost of permits, or service contracts.

A capital budget may show planned investments over several years. The following example illustrates a capital budget for a department that is migrating to a new computer system in Year 1. The budget shows migration costs expected to be incurred in Year 1, and estimated costs in subsequent years based on projected growth.

Example of a Capital Budget

Year 1 Year 2 Year 3

IT Equipment: Computers $45,000 $15,000 $15,000 Servers $120,000 $25,000 $25,000 Support Service $26,000 - $29,000 Furniture & Fixtures:

Office furniture $28,000 $6,000 $6,000 Renovation costs $89,000 - -

Capital Budgeting

Capital budgeting techniques

Capital budgeting is the process of identifying the potential return on a given investment to determine whether the investment makes sense, and to compare alternative investment options. If many different departments are competing to have projects funded, you may be asked to justify your proposals using capital budgeting techniques:

1. Prepare a schedule of estimated cash flows that identifies outlays,

the timing of those outlays, and the expected cost savings or revenue that will result from the investment. For substantial investments, consider annual cash flows over a period of several years. If an expense will be capitalized, the full outlay is recorded for the year that it is incurred. Also record the expected tax savings that will result in subsequent years as capitalized items are depreciated.

2. Calculate the net present value (NPV) of the cash flows using

appropriate interest rates.

Net present value is the current value of future cash flows—calculated by dividing each future cash flow by the compounded interest rate, and then adding up all of the discounted cash flows. You can create a spreadsheet (for situations where cash flows or the interest rates used are different from year to year) or use a financial calculator (if the cash flow and interest rate is constant throughout the period). The formula is:

where each CF is a future cash flow, \is the number of years over which the cash flow is expected to occur, and \rate.

Some experts suggest that the interest rate should be based on the company's cost of capital, while others recommend using a risk-adjusted rate that reflects the uncertainty of the future cash flows.

1. A positive net present value indicates that the investment will

potentially benefit the company, while a negative net present value indicates a losing proposition.

Sensitivity Analysis

Example of sensitivity analysis

Using scenario analysis software, you can quickly see the potential impact of a change in assumptions, without having to generate new forecasts for each budget item such as raw materials or selling and administrative costs. The following example shows how sensitivity analyses for one company might be reported.

Example of Sensitivity Analysis What-If Scenario Units Sold Direct Materials Cost Operating Income Budget 21,400 $214,000 $383,950 Scenario 1: increase unit sales 10%: 23,540 $203,300 $360,900 Scenario 2: decrease unit sales 5%: 20,330 $6,000 $6,000 Scenario 3: decrease materials cost 5%: 21,400 $203,300 $398,700

Variance in Budgeting----What causes variance?

Comparisons of actual to budgeted results allows you to consider whether corrective action is needed. The difference between the actual results and budgeted results is called the variance. The variance can be favorable, when the actual results are better than expected—or unfavorable, when the actual results are worse than expected. Unfavorable variances require corrective action so that future results will be closer to budget. If you cannot affect a particular expense or revenue item, you may be able to compensate by taking action that will cause an offsetting variance in other budget line items.

Sometimes variances are artificially created—for example, if the

company's accounting software automatically spreads line item expenses over a 12-month period and the actual expenditure only occurs once a year, you will have a favorable variance in some months and an unfavorable variance in others.

The table below shows some possible causes of variances and possible ways to respond.

Possible causes of variance and possible responses

Variance Possible Causes Compensating Action Higher Increased production None required if increase in production volume production is due to increased costs sales

Increase in price of raw Increase selling prices, reduce materials or labor other expenses

Timing differences create artificial variance

Lower revenues Fewer units sold

Lower selling prices

None required

Reduce fixed expenses and/or increase promotion activities Reduce expenses or increase selling prices

Linking the Budget to the Balanced Scorecard

A new way of budgeting

For the most part, traditional budgeting has focused on the financial performance of an organization. However, many of these financial performance measures, designed to indicate the success of budget plans in contributing to increasing profits, were developed for an industrial world.

Times have changed, and new ways of approaching planning and performance evaluation have changed as well. With information technology and global markets becoming the model for the modern business environment and as nonprofit organizations grow in size and sophistication, organizations have to recognize and value their intangible and intellectual assets as well as the tangible assets represented in numbers on the balance sheet.

The balanced scorecard and your budget

The balanced scorecard is a way for managers to view the organization from four interrelated perspectives of operational drivers for future performance:

1. Financial perspective: How are we doing using traditional financial

performance measures? How do shareholders view us? 2. Customer perspective: How satisfied are our customers?

3. Internal perspective: What ways do we, and in what ways should we,

excel?

4. Innovation and improvement perspective: How can we continue to

improve and create value in the future?

The balanced scorecard gives upper management a quick and effective view of the critical factors affecting the organization now and in the future. The balanced scorecard also puts the strategic mission, rather than financial controls, at the center of the planning process.

The balanced scorecard is linked to the budget process in the following ways:

?

It highlights leading indicators, such as new product development, customer complaints, or direct mail response rates, instead of only sales or cost figures

?

It balances the four perspectives so that, for example, pressure to develop new products doesn't overshadow the need for quality products and customer satisfaction

?

It helps management to communicate strategic goals and mission to all the stakeholders in the organization

Using templates to standardize reporting

Having a standard template for reporting provides a uniform structure when collating responses from all sections of the business. It also allows people to concentrate on submitting the required details, rather than worrying about what format to present the information in. Robert Herbold

Former Chief Operating Officer, Microsoft Corporation

Robert Herbold is the former Chief Operating Officer and Executive Vice President of Microsoft Corporation, and the Managing Director of the consulting business Herbold Group.

Mr. Herbold joined Microsoft in 1994 as Chief Operating Officer and Executive Vice President. For the following six-and-a-half years he was responsible for finance, manufacturing and distribution, information systems, human resources, corporate marketing, market research and public relations. During his tenure as COO, Microsoft experienced a four-fold increase in revenue, and a seven-fold increase in profits.

From spring 2001 until June 2003 Mr. Herbold worked part time for Microsoft as Executive Vice President, assisting in the government, industry and customer areas.

Prior to his time at Microsoft, Mr. Herbold spent 26 years at Procter & Gamble. During the last five years with P&G he was Senior Vice President of advertising and information services, responsible for the company's worldwide advertising and brand management operations, all marketing related services and management information systems worldwide. Mr. Herbold serves on the Board of Directors of Agilent Technologies, ICOS Corporation and First Mutual Bank. He recently authored the book 'The Fiefdom Syndrome'.

In 2001 Mr. Herbold was appointed by President Bush to the President's Council of Advisors on Science and Technology. He currently chairs the Council's Education Subcommittee.

Building a balanced scorecard

A Strategic Management System using the Balanced Scorecard references and refines the Balanced Scorecard as it cycles through the following steps: Translating the strategic vision, communicating the vision and linking it throughout the organization, business planning or budgeting, and listening to feedback and learning from it. (Adapated from Kaplan and Norton, The Strategy-Focused Organization)

To build a balanced scorecard, managers follow these steps:

Develop goals and measures for critical financial performance measures. In other words, develop a budget as a financial action plan.

? Develop goals and measures for critical customer performance

variables. Managers first identify the target market, and then they develop ways to measure variables such as customer loyalty through repeat buying, response rates, new customer referrals, customer complaints, price sensitivity, and so on. The focus is on

identifying ways to retain current customers, increase levels of customer purchases, increase levels of profitability per customer, and acquire new customers.

?

?

Develop goals and measures for critical internal process performance variables.

Managers look at the three areas of internal process:

1. The innovation cycle or research, development, and design of

products and service

2. The operations cycle in which the products are manufactured

and delivered or services are rendered

3. The post-sale service cycle in which customer service is the

primary activity. Each of these internal process areas relates directly to both financial performance and customer satisfaction.

?

Develop goals and measures for critical learning and growth performance measures. Here managers step back to consider the infrastructure and capabilities needed for the organization to create the long-term growth the strategic mission envisions. Growth will occur through human resources, systems, and organizational procedures. This perspective clarifies the investment decisions management has to make to achieve its goals. Will the organization have to invest in training people, in hiring more people, in improving technology systems? Empowering employees—encouraging employee loyalty—and aligning organizational structures to meet changing organizational needs simultaneously enhance the ability of the organization in the other three critical areas.

The key to linking the balanced scorecard is to develop the performance measures or drivers that can help predict future outcomes. The balanced scorecard provides the guidance for planning—the budget—which, in turn, provides feedback and allows for course correction as the time period advances. This provides information for translating the strategic vision into reality, which in turn provides learning and communication for the development of the budget planning process.

Key Terms

Activity-based budgeting (ABB). A form of budgeting based on

activity-based costing (ABC) that focuses on the cost of the activities involved in all functional areas of an organization.

Allocated costs. Non-production related costs such as rent, insurance, and administrative costs, that are allocated to individual units' operating budgets based on that unit's output.

Balanced scorecard. A method of translating an organization's strategic mission into multiple and linked objectives, focusing on financial, customer, internal business, and innovation and learning perspectives. Budget. An organization's action plan, translating strategic objectives into measurable quantities that express the expected resources required and returns anticipated over a certain period of time.

Capital budget. A schedule detailing planned investment in capital assets, property and equipment.

Capital budgeting. A method of evaluating investment proposals to determine whether they are financially sound, and to allocate limited capital resources to the most attractive proposals.

Cash budget. A plan or schedule for expected cash inflows and outflows. Financial budget. The part of the master budget that includes the budgeted balance sheet, the capital budget, the cash budget, and the budgeted statement of cash flows. The financial budget describes the expected sources of capital required to support the operating budget.

Fixed budget. A budget where the amounts are fixed over the budget period. Fixed costs. Costs that remain the same through a wide range of production and sales volumes.

Flexible budget. A budget that can be \or adjusted when variances are computed to recognize the actual revenues and costs.

Gross margin. Gross profit divided by total revenue. Gross profit is total revenue minus cost of goods sold.

Incremental budgeting. A method of budgeting in which data from historical figures are used to establish a basis for future assumptions.

Kaizen budgeting. A form of budgeting that strives for continuous cost improvement or reduction.

Master budget. The umbrella budget that summarizes and integrates all the individual budgets within an organization.

Net present value. The current value of a future stream of cash flows, based on specific interest rate assumptions.

Operating budget. The part of the master budget that includes the expected revenues and costs summarized in the budgeted income statement. Operating income. Revenue less cost of goods sold and selling, general and administrative costs.

Participatory budgeting. A budgeting approach that incorporates input from line managers in formulating assumptions and goals.

Revenue per employee. A measure of productivity, calculated by dividing total revenues by the number of full-time employees.

Rolling budget. A plan that is continually being updated so that the budget time frame remains stable while the actual periods covered by the budget change. At the end of each period (month, quarter, or year), a future period is added to the budget.

Run rate. An estimate of a future cost or revenue amount based solely on the current cost or revenue level.

SG&A. Selling, general, and administrative costs.

Static budget. A budget that remains unchanged throughout the budget period based on one set of expected outputs. Variances are computed at the end of the budget period.

Top-down budgeting. A budgeting approach in which individual departmental goals are set by senior management.

Variable costs. Costs that fluctuate with incremental changes in output. Variance. Difference between an actual amount and a budgeted amount in a financial budget plan.

Zero-based budgeting. The method of beginning each new budgeting process from a zero base, or from the ground up, as though the budget was being

prepared for the first time. Every assumption and proposed expenditure receives a critical review.

Test-focus

The cost of goods sold (COGS) section of your budget includes anything related to production. COGS includes both direct and indirect costs. For example, labor and materials are direct costs, while factory overhead is an indirect cost. You calculate COGS based on the number of units you expect to produce during the time period covered by your budget.

本文来源：https://www.bwwdw.com/article/0u6x.html