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DEFINITION ƒë A budget is a quantitative projection of business operation. ƒë It is the formal process of planning future activities that involve the acquisition and use of resources during a specified time period (called a budget period). ƒë It helps management to carry out its control function by periodically actual performance with that planned for in the budget. This comparison of actual and budgeted performance is done by using budgeted performance report. PURPOSES OF BUGETING 1. Compels Planning - Budgeting helps managers set realistic goals by requiring them to plan specific actions to meet their goals. Budgeting also helps managers prepare for a range of conditions. It leads them to ask what-if questions and to plan for contingencies. 2. Control - means to monitor the business process and rectify any deviation of the performance from original plan by comparison of actual and budgeted figures. A department or activity can be evaluated by such comparison and a budget is pretty good benchmark for evaluation as it is based on the company¡¦s current status. It considers all changes from past conditions. 3. Co-ordination - The master budget coordinates the activities of the organization. It forces managers to consider relationships among operations across the entire value chain. 4. Communication - Goals, targets, and other information need to be communicated to the relevant employees in order to promote understanding and facilitate operating flows. Budgets convey such useful information to employees who may not be directly involved in such activities. 5. Motivation -The goals and targets as stipulated in the budgets may serve as motivators for employees. BUDGET PERIOD ƒë The accounting year is often split into quarterly or monthly control periods. ƒë Fixed Budgeting Method - The budget period may be fixed for a defined time frame.
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