Question

Define budgeting.Explain in detail with examples ANY FOUR benefits of preparing the budget for an organization.

Answer 1

Budgeting:

The term budgeting is defined as estimation of revenues and expenses on a periodic basis. Budgeting is comparative study that connects past and present and also forcast future scenarios relating to finance of an entity.

budgeting is an internal tool used by the companies for various processes like cost control , pricing, decision making .Budgeting can be static and flexible

Static budgets as its name suggests remains fixed irrescptive of the period or the volume of activity whereas the flexible budget changes with the volume of activity

various types of budgets used by the organistions are

• production budget
• sales budget
• inventory budget
• cash budget
• flexible budget
• materials requisition budget

Benefits for preparing budgets for an organisation

1.  Bugeting monitors the performance of the business of the organisation

By this process the performance of the business is monitored at each stages to that of the relative past period data of the organisation or to that of entities belonging to the same industry. this clearly analyses the growth as well as the downfall along with its cause and effect .This facilates smooth running of business

2. It helps in decision making

Budgeting is an essential tool in decision making of an entity, through budgeting various forcasts can be made relating to the future periods . Budgeting also reviews past period performance . therefore by cumulating the analysis of past period data , present scenario as well as forcasts various organistional policies can be formulated.

3. Better control on the profitability of the organisation

Through budgeting there can be a better control on the costs which can inturn increase profits of the organisation . Various cost reduction options can be evaluated by budgeting where in the best profitable alternative can be selected through comparison of the various alternatives

4. Standardisation of business activities

Budgeting can facilitate an easy comparision with the industry specific standards . This brings in standardization of the activities of the entity. This improves efficiency and effectiveness of various key activities of the organisation.