Business Studies: Budgets an introduction

////Business Studies: Budgets an introduction

Business Studies: Budgets an introduction

ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Ratio Analysis:Budgets an introduction

  • As pointed out in another topic one of the principal functions of management is planning
  • It involves creating predetermined courses of action (i.e. plans)
  • A budget is a plan of action for achieving quantified objectives
  • Budgets are plans of action expressed in quantitative(measurable) terms
  • They are prepared and agreed in advance
  • They cover a specific time period e.g. the next coming 4, 12 or 24 months
  • They are expressed in either financial terms or in real terms for example a profit of $10 000 or 25 000 units
  • They cover the entire business or only sub-units or departments
  • There various types of budgets but each functional unit of the organisation can have a budget made for it
  • Thus there are production budgets, sales budgets, human resources budgets etc
  • Budgets can also be made that cover the acquisition, use and disposal of strategic resources for example cash budgets
  • Master budget- refers to the budget version of the final accounts/financial statements
  • Usually the master budget is prepared by combining all the other various budgets
  • It comprises of the financial statements but in this instance they are prepared for future periods instead of from a historical perspective
  • Fixed budget-is a budget based on a single level of activity or other adjustable variables
  • This is less useful than a flexible budget given the fact that it is impossible to foresee the future
  • Flexible budget- is a budget that is adjusted to show financial performance or business events at various levels of activity
  • A flexible budget can be adjusted to suit various levels of activity or changes in circumstance in accordance to the needs and requirements of the affected department of the entire business
  • Zero based budgeting-is an approach to budgeting in which activities are analysed as if they were being started for the first time
  • Each year and each time the budgets are prepared the balances from the previous year are excluded from the process
  • For example when making a cash flow statement/cash budget we start with a cash balance of zero
  • The opposite of this is called incremental budgeting
  • Incremental budgeting- a budgeting method in which the data for the previous year is used as a starting point
  • Budgetary control-a comparison of actual performance with the budget so that if necessary, corrective action can be taken
  • First standards for everything are established and used to predict future performance and create budgets
  • Then variance analysis is carried out to compare actual performance to these standards
  • Any variances are analysed and corrective action is taken and the process is repeated
  • Management by exception- is an administrative style whereby supervisors focus their attention on circumstances and outcomes that differ from considerably what was expected and planned for
  • with this style business managers have more time to devote to strategic planning and staff development

To read about the Uses, Advantages and Disadvantages of budges click here

To access more topics go to the O Level Business Notes

By |2017-07-06T10:36:36+00:00July 6th, 2017|Notes, O Level Business Studies Notes, Ordinary Level Notes|Comments Off on Business Studies: Budgets an introduction

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He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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