How budgets contribute to planning, control and motivation in an organisation.

Essay by kizzzCollege, UndergraduateA+, January 2006

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Businesses have to prepare for the future, companies have to set out their goals that they want to achieve and aim towards them. The purpose of a budget is to estimate the income and expenditure of a business or a part of a business over a time period. It is essential for a business to have a good budget as it helps the company in a variety of situations, it is a detailed plan and blueprint of what the company wishes to achieve using figures and detailed action plans.

Budgeting however doesn't exist on its own; it plays an integral part in all aspects of a company from planning to motivation. Planning plays an essential role within a business

All forecasts will be in monetary values rather than volume.

A budget is used as a means to exert control. By setting out the plan for the future progress may be measured.

Variance analysis may be used to analyse divergences from the budgeted figures. Thus actual sales revenue may be matched against budgeted sales revenue. The analysis will include breaking the figures down to identify price and volume variances.

From analysis of these figures it may be established that:

a. The price was too high

b. The price was too low

c. Volumes were lower than expected

Remedial steps may then be taken such as:

a. Changing price

b. Advertising more

c. Changing the marketing mix

In the Production budget actual expenditure may exceed budgeted expenditure. Again with variance analysis, material and cost variances may be analysed. Perhaps too much material as used. Was this because of poor quality and high scrap? If so was the cost of the material below budgeted costs and thus the low price was simply a false economy?

In creating the budget other departments (Marketing, Human...