Budgeting

• What is budgeting a useful component of?

  Variance analysis
• What does budgeting compare against?

  Actual figures
• What can actual figures indicate in budgeting?

  Adverse or favorable situations
• What are the advantages of budgeting?

  • Provides spending guidance for managers
  • Encourages spending discipline
  • Supports obtaining finance through profit budgets
• What is the first advantage of budgeting?

  It gives spending guidance to managers
• How does budgeting encourage spending discipline?

  By providing guidance for spending
• How can budgeting help a business obtain finance?

  By using their profit budget
• What are the disadvantages of budgeting?

  • Potential lack of expertise in budget setting
  • Encourages "use it or lose it" mentality
  • Infrequent budget reviews can lead to slack
• What is a potential issue if senior management sets the budget?

  They may lack expertise in specific areas
• What can over-ambitious targets lead to in a business?

  Issues with motivation
• What does a "use it or lose it" mentality lead to?

  Waste in budgeting
• What is budgetary slack?

  Overestimating costs to meet budgets
• What could happen if budgets are not frequently reviewed?

  It could lead to budgetary slack
• Who might overestimate their costs to appear favorable?

  Senior and middle management