Question

What are our budgeting tools and why they are important ?

Answer 1

The budgeting tools are the different methods and tools used by the management to plan and control the use of business resources. The management sets objectives for the year, then plans and allocates resources to achieve those plans. The management tries to create a rough idea of the total cost that would be incurred in the course of business and according to this idea the management sets its selling price. Also the business needs to arrange any extra funds that may be required for this year. Hence proper analysis of the budget and costs beforehand is important for the business. For this management use previous data and stats and try to predict the costs they would incure. different budgeting tools used by the management are:

Financial statement analysis: profit and loss account and balance sheet are two very important tools which help the management to massess the growth in different periods of time.

cost accounting: cost accounting helps management to acertain different costs like product cost, divisional cost, different branch cost and total cost. The management can compare this cost with standard costs and evaluate the difference in the stanadrds and actual costs.

fund flow statement: the working capital changes are found from this statement. It also helps in analyzing proper utilisation of funds.

cash flow analysis: the movement of cash from one period to another can be assessed through the cash flow statement. It helps in calculating the cash balance of the business and the variations of cash balance in two periods.

standard costing: standard costs are the predetermined cost that the management thinks would be incurred in the coming year. The standard cost are later assessed with the actual costs and reason for differences are analysed.

marginal costing: this method is used to determine the best sales mix and the selling price for the product. It helps in best utilisation of the resources and deciding whether to bulk order or not and other make and buy decisions.

budgetary control: this tool helps in analyzing the future financial need and thus helps the management in arranging the funds without the delay and at the proper time.

Importance of budgetary tools:

(1) helps in estimating revenue and costs and thus helps in eliminating any extra spending that might me incurred or was incurrend in previous period.

(2) helps in optimal allocation of funds and that funds are spend in achieving the objective of the business.

(3) comparing the actual performance with the budgeted performance helps the management to assess the deviation and reduce the cost in future. It helps the management to understand the reason for extra cost and helps efficienct and effective cost control system.