Question

1. Explain how probabilities are used in budgeting and provide an example of how a sales budget could be developed using probabilities.
2. What may be some of the reasons a company experiences actual sales that exceed budget sales. What might this variance reveal about the company’s budgeting processes?
3. When might a company consider revising a budget?

Answer 1

1. Budgets should be made such that it shows credibility and not looks over promising. It is very important for the management to make real-time promising budgets and based on that experience, it involves probability and forecasting. For example, setting time constraints for the budget uses probability like expected time is 30% or 50% or 70%. Probability is also involved in cost estimation like how much is the probable cost involved for different activities and departments. Especially in Sales budgets, probabilities are developed to have some forecasted estimates on plan achievement or collection of revenues. Using probabilities, management set standards of the sales plan for salespersons targets.

2. Difference in budgets because of actual exceeding budgeted sales is called Budget Variance. Such variances are normal and expected in businesses because of highly dynamic business environment. Sometimes, because of overspending of company on its marketing, operations, etc. increases the expected budgets cost. However, corrective actions can be taken in future to avoid increased cost. This variance reveals that proper estimates on cost was not predicted and many more factors to be considered which effects the budgets.

3.Budgets are revised in the situation when-

A.Remarkable changes as been observed in externa factors like Labour cost, material cost,etc.

B. Errors have been found in Budgets which needs to be corrected.

C. More additional expenditure is required in the budget. However, all these are to be approved by the budgeting committee before any changes.