Question

Budgeting can be costly, lengthy, and even lead to some pretty dysfunctional employee behavior, so why budget? Do the advantages really outweigh the disadvantages? Be specific.

Answer 1

Introduction : Budget is a plan covering all phases of operations for a definite period in the future. It is the formal expression of policies , plans , objectives and goals laid down in advance by the top management for the concern as a whole and for each of its sub divisions.

There are some disadvantages or limitations of budget and these are (a) Costly affair , (b) Time consuming activity , (c) doesn't guarantee success , (d) wastage of resources etc.

But still due to numerous advantageous , Budgeting is considered as a predominant measures of planning and controlling to the management . Below specifically the advantages of budgeting are disclosed.

(1) It defines the objectives of the organization with in the overall framework , it defines the results which each department should achieve .

(2) It reveals the extent by which actual results have exceeded or fallen short , for taking preventive actions for the next time.

(3) It indicates, variances or other measures of performance, the causes of differences and it also established the magnitude of differences.

(4) It provides a basis for guiding executives to correct adverse trends .

(5) It provides a basis for the revision of the current budget , or for the preparation of future budget.

(6) It provides a system whereby the resources of the organization are used in the most efficient way possible.

(7) Where the activities of an organization are subject to seasonal variations, it provides a means of stabilizing the organization's activities.

(8) It establishes a basis for internal audit by means of regular examination of departmental results.

(9) It enables standard costs to be used.

(10) It provides a basis for measuring productive efficiency with a view to paying a bonus to employees.