Question

Explain the purpose of using budgeting as a planning tool. Cite 2 examples of how management can use budgeting when it comes to decision making.

Answer 1

Budgeting as planning tool: A budget is a tool that management use to plan and control the use of scare resources. A budget is is a plan showing the company's objective and how management intends to acquire and use resources to attain those objectives.

There are different types of budgets works for different purposes, which describes as follows:

1)Responsibility Budget: these are designed to judge the performance of an individual segment or manager.

2)Capital Budget:It evaluate long-term capital projects such as the addition of equipment or the relocation of a plant.

3)Master Budget:It consists of a planned operating budget and a financial budget.

4)Planned Operating Budget: It helps to plan future earnings and results in a projected income statement.

5)Financial Budget:Helps management plan the financing of assets and results in a projected balance sheet.

The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future by default ans can react to events onlt they occur. Most business, however, devise a blueprint for the actions they will take given the foreseeable events that may occur.

A budget;

1)Shows management's operating plans for the coming periods;

2)Formalized managements plans in quantitative terms;

3)Forces all levels of management to think ahead, anticipate results:

4)May motivate individuals to strive to achieve stated goals.

Organisations can use budget-to-actually comparisons to evaluate individual performance. For instance, the standard variable cost of producing personal computer at IBM is a budget figure. This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers.

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