Budgeting end up allocating excess resources to one activity

 

 

 

 

 

Budgeting

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Budget is defined as an estimate of an entity’s income
and expenditure within a specific duration of time (Becker, 2016). A typical budget
should entail the entity’s limit on expenses, goals and objectives and boundaries.
Like any other business undertaking, budgeting has also its strong and weak
points.  Depending on a certain number of defining factors some
companies might give the budgeting a primordial place in coordinating their
daily routine while others might not take it much seriously.  Consequently, these leads to the question why
budgeting is an important tool to companies. The reason behind why the companies’
budget can be divided into three
categories, i.e. management control,
performance evaluation and planning (Becker, 2016).

First, companies prepare budgets to work as a guide
to both the management and business owners. 
Budgets work a roadmap for the company, without budgeting most
companies will incur problems keeping
track of their resources. With a proper budget in place, the company will be
able to determine the prices for their products
based on the manufacturing cost (Savic, 2016). In addition, the budget will aid the management
to determine the number of resources to allocate to different departments within
the company. Without a proper budgeting system a
company might end up allocating excess resources to one activity leaving
other business activates unallocated creating instability in the business process. 

Secondly, budgets
are important to a company as they can be used as benchmarks for controlling the company’s
expenses.  A sound budget system enables
the company to control fraudulent activities
among its staffs. Finally, budgeting is
an important tool to the management as it helps them to evaluate the performance of
the firm over a given period. Generally,
budgeting helps the company to determine areas requiring attention towards the attainment of the set objectives. A budget is a critical tool to the managers and economists when drawing the
corporate strategies.

References

Becker, S. D. (2016). Budgeting in times of
economic crisis. Contemporary Accounting Research, 33(4), 1489-1517.
Savic, B. V. (2016). THE ROLE AND IMPORTANCE OF
STRATEGIC BUDGETING FOR COMPETITIVENESS OF THE AGRIBUSINESS SUPPLY CHAIN 1.
Ekonomika Poljoprivrede, 63(1), 295.