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Budget is a summary income and expenses of a given period. It provides you a comprhensive financial overview that helps coordinate financial and oerational activities. Its an open two way communication channel. Its is also a measure of expected or desired performance.
A budget is a quantitative expression of a plan of action. These are the major benefits of effective budgeting. Budgeting compels managers to think and formalizing their prsponsibilities for planning. Budgeting provides an opportunity for managers to evaluate the activities and evaluate new activities. Budgeting helps managers in communicating objectives and coordinating actions. budgeting provides benchmarks.
Difficulties in implementing a budget
Budgeting can be expensive and sometimes its not even close to the actual numbers. Some of the departments disagree with the budget goals. Similarly another difficulity is obtaining the accurate sales forecasts. Any sort of false information would throw the budget way off the line. So accuracy is very important while creating a budget. There are different types of budgets.
Static budget predicts costs, revenues and profits at one level of output.Once it is made it doesn’t change. Where as a flexible budget is a budget that has a flexibility to for the changes in the activity. It is more sophisticated and does not change production according to the sales activity. Direct material variance the difference between the real purchase price of material and the standardised purchase price of the material is known as direct material variance. Total direct material varicance can get by multiplying the difference of the price with the actual quantity pu.rchased. It is very helpful to managers in making purchase decisions and enable them to find it favourable or unfavourable. For example, if a company buys 100,000 units of material and pays $5/ unit, compare to the standard price of the material which is $8/ unit, it is a favorable purchase.
The differecnce between actual pay rate and the standard pay rate is known as labor variance. The difference can be found out by multiplying the difference to the actual number of hours worked. For example if the difference is $2/ hour, and 20 hours of work was put in, the labor variance can be found out by multiplying 2 to 20( 2*20= 40) so the total variance is 40.