Using Budgets

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Unit 2 - Using Budgets
Budgets
Definition:
A budget is an agreed plan establishing, in numerical or financial terms, the policy to be pursued and
the anticipated outcomes of that policy.
Benefits:
They provide direction and coordination
-They ensure that spending is geared towards the aim of the business rather than the
individual.
-They can ensure a united approach within an organisation
-If budgets are given only to purposes that match the aims of the business, it will be easier for
the workforce to understand the fairness of the allocations or targets
They motivate staff
- According to Mayo and Herzberg, teams and individuals are encourage by the responsibility
and the recognition gained from meeting budget targets
- Companies may link rewards to the achievement of targets in a budget, thus providing a
further source of motivation
They improve efficiency
- By monitoring and reviewing budgets, the business is able to establish standards and
investigate the causes of any successes and failures
- It can then use this information to improve future decisions
- The discipline of working to a limited budget encourages managers to seek more efficient
methods
They assess forecasting ability
- Although changes cannot always be foreseen, businesses that can predict the future have
significant advantages
- Budgeting encourages careful evaluation of future possibilities and realistic planning
Drawbacks:
They are difficult to monitor fairly
- Senior managers will be less aware of detailed expenditure and costs, so they may rely on the
honestly of the budget holder in explaining a department or section's budgeting needs
- If budgetary targets are not met, the senior manager may not understand the reasons for this,
and again has to rely on the honesty of the budget holder when explaining the reasons why the
targets were missed.
Allocations may be incorrect
- Budgeting is based on predictions of future events
- In all areas of business there will be unforeseen changes, so the budget allocation will not be
always be right
- A cost or expenditure that is insufficient will demotivate staff
- It will also be difficult to develop the business if there is insufficient money for essential

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An excessively high income or revenue budget may demoralise a manager who cannot achieve
it
Savings may be sought that are not in the interests of the firm
- For example, to keep within a budget, a buyer may purchase cheaper materials that will
lower quality of the product.…read more

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Variance Analysis:
An important aspect of budgeting is monitoring and reviewing the actual outcomes in comparison
with the budgeted figure. Differences between budgeted and actual figures are known as variances.…read more

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Calculate Wild Side Ltd 's profit variance for January ­ March 2013 and state whether it
was adverse or favourable
June 2012 ­ Q1b
Examine the possible consequences for TT Ltd of delegating budgets to site managers
at each of its 28 sites
January 2012 ­ Q2a
Calculate the profit variance for the Lincoln branch for December only
January 2011- Q1b
Analyse two benefits that Shearings might receive from its use of budgets.…read more

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