Budgeting: Process and Importance

Flashcards about Budgeting: Process and Importance

What is a budget?

A tool for planning, implementing, and controlling activities for optimum utilization of scarce resources in a business; it explains the company’s objectives, the course of action it will choose to achieve its goals in detail, and the controls to be put in place for achieving its successful implementation.

What is the budgeting process?

The process of putting a budget in place, involving planning and forecasting, implementing, monitoring and controlling, and finally evaluating the performance of the budget.

Why is a budget essential for any organization?

It helps keep track of its income and expenditure, makes performance evaluation easy with set targets, and helps take corrective action timely in cases of under-achievement of income or excessive expenditure.

What are the two main approaches to the budgeting process?

Top-down approach and Bottom-up approach.

What is the Top-down approach in budgeting?

Preparing the budget by the company’s senior management based on the company’s objectives. Departmental managers are assigned the responsibility for its successful implementation.

What is the Bottom-up approach in budgeting?

This budgeting process starts at the departmental level and moves up to higher levels. Every department is required to prepare plans for its proposed activities for the next budget period and estimate the costs it will incur.

What is the first step in the budgeting process?

Preparing the base for the budget according to funding by identifying budget goals and how they will be achieved, considering factors such as the business’s socio-economic surroundings and sales trends.

What is the second step in the budgeting process?

Creating a cost buffer by scrutinizing the costing for the business and evaluating factors that can affect input costs during the budget period.

What is the third step in the budgeting process?

Preparation of revenue and expenditure budgets, including realistic forecasts for sales, production, cash, purchase, labor and overheads, selling, general and administrative expenses.

What is the fourth step in the budgeting process?

Incorporating departmental budgets by collecting and integrating smaller department budgets along with the master budget.

What is the fifth step in the budgeting process?

Incorporating bonuses by making due provisions in the budget for unplanned giveaways such as employee bonuses.

What is the sixth step in the budgeting process?

Provision for capital expenditure by including plans for significant capital expenditures or investments in fixed assets in the budget after consultation with top management.

What is the seventh step in the budgeting process?

Changes in the budget model and review by thoroughly reviewing the entire budget and making any necessary changes in the budget model.

What is the eighth step in the budgeting process?

Approval and implementation by obtaining top management approval and proceeding with implementation if the budget is deemed proper.

What is the ninth step in the budgeting process?

Budgetary controls which involves setting proper budgetary controls, comparing actual performance with budget provisions, and continuously reporting variances for corrective actions.

Why is setting priorities important in Budgeting?

A budget helps to channelize resources across various departments as per the top management’s priorities and goals.

Why is controlling expenditures important in Budgeting?

A budget helps to control wasteful expenditure in an organization because resources are scarce, hence, their allocation in the best possible manner is necessary for maximum returns.