Budgeting

Question 1

Advantages of budgeting…

Answer 1

• they promote forward thinking and help identify short term problems
• can be used to help coordination between the different departments or sections of the business
• can motivate managers to perform better as budgets are derived from business objectives
• can provide a basis for system of control
• important to make a the targets or budgets realistic so it motivates the managers

Question 2

Disadvantages of budgets…

Answer 2

• they cannot deal with fast changing environments and are often out of date
• focus too much management attention on achievement of short term financial target - should focus on things to value business e.g. brand loyalty
• can take up a lot of time
• can encourage dysfunctional behaviour (managers compete for resources and relaxed goals for upcoming year)
• focus on short term financial target and not long term

Question 3

What does variance analysis do?

Answer 3

• It allows the business to evaluate the impact of each variable profit through:
• price - allowing what happened to profit if purchasing teams but materials at a different price
• sales volume - allows to understand what happens with profit if the sales volume changes
• efficiency - allows to understand what happens with profit if the production team improves efficiency and use fewer hours to make volume