Question

1. What are six advantages of budgeting? How do these advantages demonstrate the managerial accounting roles of planning or control?

Answer 1

Budgets:

“A Budget is the monetary or quantitative presentation of business plans and policies to be pursued in the future period of time.”

“A Budget is a financial statement prepared prior to a predetermined period of time of the policy to be pursued during that period for the purpose of attaining a given objectives.”

The advantages of budgeting include:

• Planning orientation. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget - at least it is thinking about the company's competitive and financial position and how to improve it.
• Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out what aspects of the business produce money and which ones use it, which forces management to consider whether it should drop some parts of the business, or expand in others.

• Assumptions review. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which managements decides to operate the business.
• Performance evaluations. You can work with employees to set up their goals for a budgeting period, and possibly also tie bonuses or other incentives to how they perform. You can then create budget versus actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is most common with financial goals, though operational goals (such as reducing the product rework rate) can also be added to the budget for performance appraisal purposes. This system of evaluation is called responsibility accounting.
• Funding planning. A properly structured budget should derive the amount of cash that will be spun off or which will be needed to support operations. This information is used by the treasurer to plan for the company's funding needs.
• Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in.
• Bottleneck analysis. Nearly every company has a bottleneck somewhere, and the budgeting process can be used to concentrate on what can be done to either expand the capacity of that bottleneck or to shift work around it.

Budgeting forces the management to study about the problems relating to the timely implementation. It generates a sense of caution and care among the line managers.

It guides the management relating to the planning and formulation of policies.

3. Budgeting provides a means of controlling income and expenditure of a business. It gives a plan for spending