Question

Discuss why a firm prepares a budget and how they analyze the ongoing performance. What advantages does a business have by going through the budget process? Be sure your response is at least 200 words. Please no hand-written responses.

Answer 1

Budgeting is a process where a company projects its annual capital and revenue requirements. There are mainly 2 types of budgeting methods. Fixed Budget and Flexible budget. A fixed budget does not change with regard to change in level of activities performed but a flexible budget change with regard to level of activities performed.

Fixed Budget example: if the capacity of production is 50% of installed capacity bueget will be done for the same. If tomorrow volume of sales goes down and production is impacted budget doesn't change hence there will be huge variation between budget and actuals.

Flexible Budget example: The projection will be done for various levels like 50%, 75% and 100%. So it will b easy to compare the budget with actual level of production and sales etc.

A business entity keeps comparing the Actual expenses and revenues against the budgets and analyse the variance to know how they have performed against budget. If the Actuals are less than budget means they have performed well. If actuals are more than the budget then it calls for thorough analysis of variance as to what made particular expenditure to go beyond budget.

Advantages:

1. Effective way of projecting revenue and expenses will help in knowing the cash flow position

2. It helps organisations to control their expenditure and make profits

3. It helps organisations to track unusual expenditure