Question

(a) The definition of budgeting and its concept. (b) Three advantages of budgeting

Answer 1

(a)

Budget

A budget is an estimation of revenue and expense over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.

Budgeting

The process of making a budget is called budgeting which is done by a particular individual. In other terms, Budgeting is a process of looking at a business’ estimated incomes (the money that comes into the business from selling products and services) and expenditures (the money that goes out form paying expenses and bills) over a specific period in the future. It allows a business to see if they will be able to continue operating at their expected level with these projected incomes and expenditures.

Concepts to be kept in mind while preparing a budget:-

Depreciation-Some value of an asset is reduced every year as depreciation. We need to budget for operating costs and depreciation, so you have sufficient cash to replace these assets when they’re used up or no longer useful.

Opportunity cost-When we produce a product A, we lose an opportunity to produce the product B, which would have also generated some revenue. When developing a budget, consider opportunity cost, and make choices on how to use assets that minimize these costs.

Cash flow-The statement which shows all the cash inflows and outflows in a company during a year. while making a budget it is necessary to make sure we have at least as much cash flowing in as we do flowing out.

(b)

Three Advantages of Budgeting

1. Budgeting compels and motivates management to make an early and timely study of its problems. It generates a sense of caution and care, and adequate study among managers before decisions are made by them.

2. Budgeting provides a valuable means of controlling income and expenditure of a business as it is a “plan for spending.” Budgeting the exact amount of money to pay premiums in the months they come due helps us manage our cash flow, to ensure that we have money on hand to pay our bills each month.

3. Problems can be anticipated and avoided by possible remedial action (doing so after the problem crystalizes would be too late).This will help in smooth operation of the company or the business.