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Account principle - Essay Example

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Budget in any corporate entity serves several purposes and those can be described as per the following. a) It is an instrument to plan and deploy the resources to achieve the short-term and long-term goals of any organization…
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Download file to see previous pages b) It is a tool to control the activities of different subunits within the organisation. c) Budget exercise is used as a tool for forecasting and it can be used to motivate employees towards the set goals. Budgetary activity facilitates the planning process of the firm in a systematised manner keeping in view the organizational goals. Budget not only helps allocate resources and set the direction of the firm but also helps determine priorities to act in a manner that can bring results. Since budget sets targets in numbers, monitoring becomes easy and effective; it helps guide and coordinate activities of different functional units within the organisation. For startup businesses, a budget acts like a roadmap that helps them formulate goals and assess their functioning. For established businesses, a budget helps them see their performance through the years and likely future growth prospects to justify their capital investments. By comparing actual and budgeted figures, management can see how well or bad their organisation is sailing through in the marketplace. Budgets help forecast the need of cash flow without which any business is likely to strangle and suffer immensely. Budget brings efficiency in the operation by providing a framework for performance evaluation of different unit heads and the whole organisation. Budget is the best way of controlling expenses and to take remedial measures as and when becomes necessary ((Budgets and Budgeting, 2012). Answer (B) Conventional budgeting works best when conditions are relatively stable and market is continuously growing. In a downturn, the approach has several fallacies. There is no doubt that conventional budgeting system has contributed a lot ever since corporations began working in a more systematized way yet it is a fact that conventional budgeting system has its own strengths and weaknesses. Conventional budgeting exercise looks at the numbers of the previous year and then depending on the targeted growth decides for expense and revenue figures. Traditional budget is also known as incremental budgeting. Some of the advantages of the conventional budget are: a) It is more stable and brings gradual change. b) It is more simple and easy to work on it. c) Any changes can be observed easily. d) It is easy for managers to run their department on traditional budget formulations. e) The impact of change is visible clearly. Following disadvantages are observed in the conventional budgeting (Stokdyk, 2007). f) There is not enough space for new ideas. g) Cost reduction is not provided with suitable incentives; spending up to budgeted figure gets natural encouragement so that next year’s budget do not get converted to a reduced amount. h) It is likely that priority may have changed after budgets are set; and budgeted figure may have gone out of date due to inflation or extraneous factor that has now no connection to the level of activity and type of work being performed. Budgetary Control through Variance Measurement Variance analysis sets the process for budgetary control. Any change from the budgeted figure is known as variance and variance can be either favorable or adverse. When revenue is higher or expense is less than expected, a favorable variance occurs. An adverse variance is said to have occurred when revenues are lower or expenditures are higher than forecast. Budget needs to be monitored for variance for a suitable time period so that timely remedial action can be taken. A following illustration speaks about favorable and adverse variance with respect to expense and revenue generated in a typical organization. Adverse/Favourable Variance Yearly Budget Pro rata monthly Budget Monthly Actual Variance Labour Charges ?360,000 ?30,000 ?31,500 ?1,500 (adverse) Raw Materials ? 720,000 ? 60,000 ?62,500 ...Download file to see next pagesRead More
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