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The Purpose of Budgeting.

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Introduction

Budgeting Purpose of Budgeting A budget is simply a financial plan for the forthcoming year, that is drawn up to help a business achieve its objectives. Budgets are often used to exert a degree of control over the costs of the business, in an attempt to achieve gains in efficiency. When a business draws up its budget, it is essentially a series of smaller budgets covering all areas of operation. The main budgets that are drawn up are : 1) A sales budget. This forecasts the number of units of each product that the business aims to sell next year, the price level that will be charged, and the corresponding amount of sales revenue that is likely to be received. 2) A production budget. This forecasts the number of units of each product that the business aims to produce over the next year. It will include the materials budget, which will indicate the raw materials that need to be purchased. 3) A staffing budget. This will specify the direct and indirect staff that are required throughout the business for the forthcoming year, in terms of the number of staff and their wages. ...read more.

Middle

for sales, costs, etc) and the actual results are known as variances. The business needs to investigate these variances and attempt to establish the reasons for their existence - this is known as budgetary control. Variances can be either positive or negative. Positive (i.e. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure, or where the actual amount of money flowing out of the business is less than the budgeted figure. This could be due to a variety of reasons, including an increase in the demand for the products of the business, a reduction in the labour costs, or competitors ceasing to trade. Negative or adverse (i.e. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure, or where the actual amount of money flowing out of the business is more than the budgeted figure. This could be due to a variety of reasons, including price discounts on the products of the business, an economic recession or a rise in labour costs. For example, consider the following data which has been extracted from the budgeted figures and the actual results for a business : Budget Actual ...read more.

Conclusion

However, the utility bills actually cost �16,000. This is an adverse (A) variance of �1,000 (or 7% of the budgeted figure), since it results in the business spending more money than it budgeted for. When investigating and analysing the variances, it is common for managers to concentrate on the large positive and large negative variances and ignore the smaller variances. This is known as management by exception and involves the managers focussing their attention on those areas which have resulted in large overspending or underspending, and attempting to discover the reasons behind it. Zero Budgeting This is where a budget is set to zero for a given time-period, and the manager of the particular division or department then has to justify any expenditure which they wish to make. It is often used in an economic recession or a downturn in the industry, when money is not as readily available and the business wishes to make cutbacks in its expenditure. Zero budgeting helps the business to identify those departments which require large amounts of essential capital and day-to-day expenditure, as well as identifying those departments which require minimal expenditure. However, zero budgeting can result in managers spending far more of their valuable time on the budgeting process than would be the case if budgets were set more traditionally. ...read more.

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