Question

Exercise 1-5. Budgets [LO 1]

Megan Kelly is the chief financial officer of a chain of 25 drug- stores. Explain how she can use budgets in both planning profit and controlling operations.

Answer 1

Budgeting is an important tool in financial management which not only help in planning profits but also in controlling the operations or the costs associated with operations.

While planning profit we can use the budgets as a deciding factor as to what we really want our business to achieve and we can have an understanding that whether the planned profits can be achieved with the help of budget figures, a budget helps us in understanding the goals clearly.

When a budget is made it clearly shows the Sales figures for future years and then we proceed onto the production budgets which show the costs that will go in to achieving the desired level of sales and profit for that matter.

When the production budget has been made then the focus goes on purchase of materials, direct and indirect labor to be employed and the overheads that will be incurred, after making all these budgets we can actually find the variances in different costs to see the difference between the figures that were planned and the figures tthat are really incurred.