Question

1. Discuss the advantages of having budgets as a primary management control tool.

Answer 1

The primary thinking of management is to know how the business is going. Budget helps to understand such thing when it is compared with actual.

Advantages:

1) Planning: Budget helps to make definite plan for future; therefore, it creates objectivity. Suppose the firm wants to make 25% more profit out of future activities. It also make plan in which ways funds would be utilized.

2) Prediction analysis: Management used to take few assumptions on budgets. These could be analyzed in few periods whether those assumptions or prediction are going into right track or not. Suppose the prediction of future market improves from the last period.

3) Performance: Actual data when compared with budget gives meaningful review of performance; suppose there is unfavorable direct labor cost variance, because the actual cost is higher than budgeted.

4) Bottlenecks: Budget helps to understand why a particular activity becomes unsuccessful; therefore, this is the act of removing obstacles.

5) Scarcity of resources: Since the resources (land, labor, capital, and organization) are limited proper plan-wise budget is very necessary. It gives exact allocation of resources so that the best result could be achieved without any wastage.