Question

Explain the objectives of budgeting

Answer 1

Objectives of Budgeting

1. To establish relationship between inputs and output- Budgeting establishes clear relationship and balance between inputs such as material, labours, capital and time and the output such as production, profit and performance.
2. To establish co-ordination- Budgeting is also used for co-ordinating activities of various departments of the organization. Thus production should bear logical relationship with sales and sales budget cannot be prepared without knowing production techniques, programmes and schedules.
3. To Motivate- Like all other controlling techniques, budgetary control also acts as a source of motivation to the executives who are involved in the execution of budgets. They are given the requisite amount of authority, allocation to resources to achieve the budgeted targets. With this freedom they tend to act highly motivated.
4. To control- It is an effective device of control to the management. Under budgetary control, actual performance is compared with the pre-determined standards so as to see any deviations are there or not, and if deviations are there, then to take corrective measures.
5. To help in planning- Budgets are an important instrument for managing planning. Budgets provide time bound targets and determine future course of action for achieving these targets.
6. To establish concentrated goals- Budgeting helps in establishing clear cut goals, targets and policies with the help of which whole organization can work in a concentrated manner to achieve these targets.
7. Management by exception(MBE)- The goal of MBE is sought to be achieved by Budgetary Control. Deviations from budgeted targets are noticed and corrective action is taken by the management.
8. To avoid Back-Passing - It establishes clear responsibilities at the individual, department, segment and all other levels and thus prevents ambiguity and back passing when the goals are not achieved.
9. To have favour with credit agencies- Managements who have developed well ordered budgets, generally get favour from credit agencies.
10. To have effective use of resources- Since resources, whether financial or physical, are limited in every organization, Budgeting control helps in effective utilization of resources. Budgeting helps in allocation of different resources to different segments of the business according to their requirements.