Chapter 16 Using Budgets

Chapter 16 Using Budgets

1. Benefits of Using Budgets

   • Controlling Finances
     • More of the Budget can be given to underperforming departments
     • If everyone is responsible for a budget holder, everyone will ensure that they will not overspend, therefore the department will not exceed the budget
   • Improving Staff performance
     • 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.
     • 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

2. Keywords

   • Variance
     • The difference between a budgeted figure and the actual figure achieved.
   • Variance Analysis
     • The Comparison of its actual performance with its expected budgeted performance over a certain time period.
   • Adverse variance
     • This is the change from a budgeted figure that leads to lower than expected profits
   • Favourable variance
     • This is the change from a budgeted figure that leads to higher than expected profits.

3. Potential Drawbacks of using Budgets

   • Conflicts can arise
   • The Motivating impacts can fail