Question

What is a budget? And discuss some of the major benefits to be gained from budgeting.

Answer 1

A budget is a financial plan of action for future. It helps an organisation in achieving the strategic objectives and goals. It gives a competitive edge to the firm to win in the market place. Budgets are widely used by organisation to achieve the vision of the firm.

When budgets are implemented it gives enormous benefits to the organisation. Below are the listed benefits to be gained from budgeting

· Efficiency: The use of budgetary control system helps the management to conduct its business in an efficient manner.

· Control on expenditure: Budgetary control is a powerful tool for controlling expenditure in an organization. It is used as a yardstick for measuring performance of the individuals and departments at the end of the year. Incentive systems are linked to performance based on control of expenditure

· Controlling Deviations: It helps the management in understanding the deviations between actual results and budgets and taking remedial actions to control the same

· Effective utilization of resources: Budgetary control system helps the organisation in effective utilisation of its limited resources like money, material, labor, machine hours etc. Budgets are developed after considering all constraints. It helps in right product mix decisions.

· Implementation of standard costing system: Budgets helps in developing standard costs for products and services. It helps in implementation of standard costing system.

· Cost Control and Cost Reduction: Budgets helps in controlling cost and implementing cost reduction programs in the organisation. Overall it helps in cost management exercise of the firm

· Performance appraisal : It helps in performance appraisal of employees at the end of the year and giving incentives to the employees

· Helps in decision making: It helps in various decision making like new product launch, evaluation of investing, product pricing, continue or discontinue of divisions or departments, make vs. buy, etc