5.5 Budgets

A budget sets expected income, expenditure or resource use for a future period. It translates objectives into numbers that can be monitored and revised.

Budgets coordinate departments and provide a baseline for control, but targets can motivate or distort behaviour depending on how they are set and used.

A marketing budget can reserve money for a launch while linking spend to expected reach and sales; managers can then investigate a shortfall rather than simply cut blindly.

A budget is a plan under assumptions, not a guaranteed outcome or a substitute for judgement.

A variance is the difference between budgeted and actual performance. A favourable variance is not always good and an adverse variance is not always bad; interpretation depends on the cause and objective.

Price, volume, efficiency, timing, one-off events and unrealistic assumptions can all create variance. Managers should focus attention on material, controllable and decision-relevant causes.

Lower labour cost may reflect efficiency—or understaffing that reduces quality. Higher material cost may follow a deliberate quality upgrade.

Blaming a department from the number alone ignores causation, interdependence and the quality of the original budget.