Question

Describe the importance of the three types of budgeting? capital budgeting, flexible budgeting, and master budgeting.

Answer 1

Budgeting: Budgeting a process of estimating the cost and benefit at a estimate level of activity(ies). Budget is useful in planning the activities and cost associated with them along with controlling the activities by ex-post analysis.

There are different types of budget. each are having its own importance. These are:

1. Capital Budgeting: Capital Budgeting is used to determine the overall viability of project in terms of financial feasibility. This is generally used for taking decisions regarding long term projects involving high volume of money and risk. The importance of Capital Budgeting are:

i. Irreversible decisions: Since, large projects involves high cost and are generally can not be subsequently rectified, if decisions in regard to same are taken wrong. Hence, Capital Budgeting decision must be taken before carrying out such projects.

ii. Huge fund involved: Since, Large amount of fund is involved, decisions must be taken very carefully.

iii. Long term Effect on profits: Since, most of the decisions are of capital in nature, it affects long term profits.

2. Flexible Budgeting: It is a budget involving various series of budgets at different level of activities, cost and revenues. The importance of Flexible Budgeting are:

i. Better cost control: Since, it involves comparative study between various level of activities, it helps in better cost control.

ii. Updated with current data: One can add as much level of activities as much he wants, which enables this type of budgeting to give latest and updated information.

3. Master Budgeting: As the name suggests, master budget integrates all other divisional budget. Since, it is integrated with all divisional budget it provides a broader picture of the organisational activities and cost and revenues associated towards that. Some of the importance of Master Budgeting are:

i. Inter-divisional Coordination: Since, master budget involves all other budgets, it integrates all the divisional to strive for a common goal.

ii. Measures Performance: Master budget is able to tell the loopholes and the variance by comparing the budgeted data with the actual one.

iii. Important planning tool: Master budget shows the overall performance of an enterprise and also estimates the cost involved for getting one activity completed and the overall activities completed along with cost associated with them.

Thank You.