Question

1. Explain how a budget can be used to evaluate a manager’s performance and provide incentives.

2. Distinguish between operating budgets and financial budgets. Explain this within the context of formulating the annual budget for a university.

Answer 1

1. Budget and evaluate the performance of the managers and decide the incentive to be given to the manager by comparing the button actuals of the past performance.

If budgets are prepared at the inception of the accounting period then at the regular time intervals the actual performance of the departments and managers are compared between the actual and budgets.

If the results are very satisfactory and beneficial to organisation managers are awarded with incentive if not favourable to organisation they are not awarded with incentives. Amount of incentive will be decided based on the favourable activities done and benefit earned by the organisation from performance of the manager.

2. Operating budgets and financial budgets having large differences.

Operating budgets always deals about the basic operating activities of the organisation. All the budgets are prepared on the basis of the cost incurred to perform the basic operations.

Financial budgets are complete budgets of the organisation which not only take care of operating activities but also administration department and all the corners of the organisation.

Financial budgets considers all the costs incurred to run the company for a particular budgeted period and also consider estimated income for all the year.