Outline the essence of budgeting.

The budget is essentially a business plan for the short term, usually to be
expressed in financial terms, but can also be expressed in terms of volume, etc. It
is designed to convert the long-term plan into an actionable blueprint for the
future. Budget is usually done annually. Its assisted by the forecasts, and can be
used for motivating employees, acts as a control factor of the performance
against plan, coordinate various sections of the business, and provide a system of
authorisation for management to spend up to a particular limit.


What are the benefits of budgeting?
Budgeting promotes forward thinking and the possible identification of short-
term problems. The discovery may allow options for overcoming the problem, as
the best solution may be feasible only if action can be taken well in advance.
Budges can be used to help coordinate various sections of the business, to link
the activities of the various departments and sections so that the activities of one
complement those of another. They can motivate managers and employees to
better performance, by having a stated task and to define a required level of
achievement. Employees, knowing that their particular role is related to the
overall objectives of the business, is likely to be more motivated. They also acts
as a basis for a system of control, to ensure that the actual performance conform
to the planned performance. It acts as a yardstick or standard to measure the
performance. Budgets also provide a system of authorisation for managers to
spend up to a particular limit, to better assist resource allocation, such as on the
discretionary activities.


A budget is not a forecast of the future, it is a plan. It suggests an intention or
determination to achieve targets, but forecasts tend to be predictions of the
future state of the environment. Forecasts are very helpful to the budget setting,
however, the forecast and the budget are distinctly different.

Monthly budgets doesnt have to be prepared with a column, as that may induce
mechanical exercise and the benefits will not be so large.

This statement is not true. All initiatives can be included in the budgets, if
management is able to propose and set them in advance. The managers worth
employing is likely to work in a business that uses budgets to control, as this sets
a stated task and a required level of achievement, which can motivate them, and
to achieve the overall objectives of the business.

Activity based budgeting is in which the activities that incur costs in every
functional area of an organization are recorded and their relationships are
defined and analyzed. Activities are then tied to strategic goals, after which the
costs of the activities needed are used to create the budget.

Budgeting process do not always have to start with the sales budget. Its most
common because as this leads to determine the overall level of activity for the
forthcoming period. This is because sales level is often the most common limiting
factor. However, the budgeting process can start with other budgets, e.g.
production budget, if the volume and capacity of production is the biggest
limiting factor, and is the determinant of the whole budgeting process.

This statement is not true. Favourable variances also need to be investigated, as
this can help to improve business performance and the identification of the
source can be continued and duplicated in the future. Management can learn and
progress from this process.