In: Accounting
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How are budgets used for performance evaluation? Give details to support your answer.
Budgets are prepared by the management to set target for an organization and to evaluate the performance of such organization on the basis of pre-determined yardsticks of budget. For example production budgets are made to provide the employees and workers of production department with expected targets that are to be achieved within a particular period. After the end of such period the same budget is used to evaluate the performance of the workers and employees of the production department. The actual production and performance of production departments are compared with the production budgets to calculate the variations between the two. Similarly sales budgets, overhead budgets and other such budgets are used to evaluate the performance of different departments of an organization. It is important to mention here that the budgets must be prepared taking into consideration the actual factors and should be realistic in order to be used for evaluation of performances in the future.