Purpose of Budgtes

Question 1

What is the purpose of budgeting

Answer 1

P – Planning
R – Responsibility
I – Integration and Co-ordination
M – Motivation
E – Evaluation and control

Question 2

What are the advantages and disadvantages of implementing a budget

Answer 2

Advantages
* Forces the organization to plan and set targets
* Allocates responsibility
* Encourages co-ordination and integration between departments
* Can motivate employees
* Provides targets to evaluate performance

Disadvantages
* Can result in plan fixation and loss of flexibility
* Takes management time
* Can be demotivating if considered too hard
* Variance reports and other evaluation outputs do not offer solutions
* Deemed successful if achieved but no incentive to exceed
* Encourages spending in order to protect the allowance in future periods