Chapter 16 Using Budgets

Benefits of Using Budgets
1. Controlling Finances
  1. More of the Budget can be given to underperforming departments
  2. If everyone is responsible for a budget holder, everyone will ensure that they will not overspend, therefore the department will not exceed the budget
2. Improving Staff performance
  1. Budgets can be used as a financial objective for a department. Employees can gain satisfaction from being given the responsibillity to meet a budget. Staff motivation may increase from being recognised as a responsible budget holder. This can keep expentiture low as employees want to exceed sales.
  2. The financial targets and workers ability to meet thm can also be used as part of a staff ppraisal system. this allows actual staff performance to be judged agaisnt the orginial budget
Keywords
1. Variance
  1. The difference between a budgeted figure and the actual figure achieved.
2. Variance Analysis
  1. The Comparison of its actual performance with its expected budgeted performance over a certain time period.
3. Adverse variance
  1. This is the change from a budgeted figure that leads to lower than expected profits
4. Favourable variance
  1. This is the change from a budgeted figure that leads to higher than expected profits.
Potential Drawbacks of using Budgets
1. Conflicts can arise
2. The Motivating impacts can fail

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