Question

Budgets are an integral part of management control systems. Evaluate this statement with real life example.

Answer 1

Budget is a financial plan or we can say a statement of estimated revenues or expenses for coming future.

Budget can be prepared for a business, government or for an indivudual as well.

Budget has alot of significance but the most useful one is that it acts as a budgetary control tool.

As a budgetary control, it acts as a tool for the management to allocate responsibility and authority in planning for future and to develp a basis of measurement to evaluate the efficiency of operations.

As a control perspective, first of all a budget is set and then later on it is compared with the actual results and thus measuring the deviations and if there are negative deviations then ways should be found to correct those deviations and if there are positive deviations even then they should be investigated to know the reason leading to positive deviations and results can be improved further as well.

Some real life examples are as follows:

Budgeting helps an organization to allocate the resources to various departments.

Like Nestle is a company selling different kinds of products like chocolates, biscuits, energy drinks etc. Thus, for managing different priducts and their sale Nestle has a proper budgetary control in place which starts right from allocating money to each product line and setting up their targets and after completion of time for which the budget was made, the performance is measured by Nestle and compares the deviations.

Nestle provides bonus and increments to the employees of each product line based on their performance in achieving the objectives of the organization.