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Benefits of using Budgets
They provide direction and coordination they ensure spending is focused towards
the aims of the business, rather than individual.
They Motivate the staff Mayo and Herzberg say that teams and individuals are
more encouraged by responsibility and getting recognition when they meet budgets.
Improving efficiency through monitoring and reviewing budgets, the business is able
to establish standards and investigate causes and effects of successes or failures.
Assessing forecasting ability although changes cannot always be foreseen,
businesses can predict still predict the future a business that can do this has a big
advantage in the market.
Drawbacks of using budgets
They are difficult to monitor fairly it can be hard for managers to keep a track on all
budgets so need to trust other members of staff to do this, and make sure all the
different sections of the business are correct, similarly if budget needs are not met
managers may find it hard to understand why.
Allocations may be incorrect budgets are based on predictions of future events, In
all areas of business there will unforeseen changes, which means the budget
allocation may not always be correct.
Savings may be sought that are not in the interests of the firm for example, to keep
within a budget, a buyer could purchase cheaper materials at the cost of quality, I
doing so the buyer may cause the consumer dissatisfaction and thereby affect the
holders of revenue budgets in particular.
Features of good budgeting
Be consistent with the aims of a business means managers cannot use the
companies finances for their own gain.
Be based on the opinions of as many people as possible provides different ideas
and expertise, helps come up with a set of realistic targets.
Set challenging but realistic targets SMART objectives, budget must be achievable,
but only demonstrate a reasonable and expected level of effort and skill in order to
reach the target.
Monitored at regular intervals, allowing for changes in the business and it's
environment the more often a budget is monitored, the more quickly these actions
can take place.
Be flexible crucial that the budgeting allows for changing circumstances .
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The process by which the outcomes of budgets are examined and then compared
with the budgeted figures. The reasons for any differences (variances) are then
Formula : variance= budget figure actual figure
A favourable variance is when : actual revenue is greater than budgeted revenue, actual
costs are below the budgeted costs
An adverse/ unfavourable varianc is when : actual revenue is lower than budgeted revenue
and that actual costs are higher than budgeted costs.…read more