Advantages And Disadvantages Of Budgeting

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Budgeting
Businesses need to plan for the future and one of the ways of planning for the future is to prepare a budget so that actual information and results can be compared with the expected information in the budget.
‘A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues; resource quantities, costs and expenses; assets, liabilities and cash flows’ (The Chartered Institute of Management Accountants, 2005)
A budget is a quantified plan of action for a future period. It can be imposed or participatory.
When setting up a budget, companies usually consider the following among others:
• Long term plan
• Limiting factor
• Budget manual
• Sales budget
• Production capacity
• Discretionary costs
• Consolidation and coordination
Examples of budgetary systems
• Incremental budgeting: This is concerned mainly with the increments in costs and revenue which will occur in the coming period.
• Fixed budget: A budget which is designed to remain unchanged regardless of the volume of output or sales achieved.
• Flexible budget: A budget which, by recognizing different cost behavior patterns, is designed to change budget volumes as volume of output changes.
• Zero based budgeting: Rejects the assumption, inherent in incremental budgeting. Involves preparing a budget for each cost center from a zero base. Every item of expenditure then has to be justified in its

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