P6: Illustrate the use of budgets as a means of exercising financial control of a selected company.
M4: Analyse the reasons why costs need to be controlled to budget.
D3: Evaluate the problems they have identified from unmonitored costs and budgets.
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Ellie Mae Smith Unit 2, Assignment 5
P6: Illustrate the use of budgets as a means of exercising financial control of a selected company
A budget is an estimate of the costs, revenues and resources over a set time period, which reflects a
business future financial conditions and goals. A budget is important as it also provides a plan of
action for achieving quantifies objectives, allows the business to measure its performance and can
be used to cope with foreseeable adverse situations.
McDonalds use budgets to be able to show to banks or other organisations how well the business is
expecting to do, if the franchise is only expecting to spend £100,000 in the next year but expecting
to receive a £1million profit then they are highly likely to receive financial support if they can prove
the loan will be returned. A budget also lays out what the company/franchise can spend over the
next year with a breakdown of how the money will be spent on different things, for example the
budget will include how much they can spend on employee wages and how much food should be
brought. This will ensure that they do not overspend overall and in certain areas, it is important the
business sticks to the budget they have in order to be successful. A budget will limit the amount
McDonalds can spend on a certain operation, budgets could the expenses to make sure money is not
wasted on items which are not essential.
A company should be able to establish their priorities from their budget, they should see which
areas are entitled to more money, e.g. Research Department, the Marketing Department, and how
much should be spent on food in different stores. Staff should be informed about the company’s
budget and kept up to date throughout the year on how well they are doing with sticking to this, if it
looks like a certain store will go above their budget it may motivate staff to do what they can to
ensure the money spent is kept to a minimum, jobs and responsibilities may also be delegated
within the store so all staff are useful and are having a positive impact, if they aren’t worth the
money they’re paid to be there they should be delegated tasks to do. People within McDonalds will
have responsibilities concerning different aspects of their budget to ensure the spending is done
efficiently and money is not spent unnecessarily, for example they are not overstaffed or stores do
not have more food than needed which would result in being wasted and therefore a waste of
money.
The table below shows McDonalds previous budget information and I have worked out the
variances.
Some areas have spent more than their budget, in order to correct the materials and other costs
variance McDonalds could use some of the money which has been predicted to come in in different
areas.
The break-even point is when the total revenue exactly matches the total costs and when the
business is not making a profit or a loss. A business should find out their breakeven point to help
plan the levels of production it needs to be profitable. You can calculate the breakeven point by
drawing a graph which shows how fixed costs, variable costs, total costs and total revenue change
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