Budgets

A budget is a financial plan that is prepared by the business in order to achieve certain financial objectives. 

An example budget

Variance is the difference between budgeted and actual figures. For income it is actual - budget and for expense it is budget - actual.

Types of budget

• Sales budget - used for estimating the level of sales that a business expects to generate
• Production budget - used to calculate the expected level of goods a business wants to produce in order to generate the budgeted sales
• Overhead budget - includes all miscellaneous expenses related to the production of goods and services
• Marketing budget - includes the cost of marketing and advertising which should be incurred to generate the expected sales

Advantages of budgets

• It is a method of controlling and monitoring incomes and expenses
• Budgets help a business plan the future actions in order to fulfill their objectives
• If the employees achieve their targets motivation will increase

Disadvantages of budgets 

• Understated budgets lead to higher variances and positive impressions. This can be manipulated
• All departments must work together to create a budget and avoid conflict
• If the information used is inaccurate, the entire system will give wrong output and hence the wrong targets may be set