- Budgeting helps in making proper planning decisions leading to efficient and proper utilization of resources within an organization.
- It helps in coordination of different departments and activities within an organization so as to achieve desirable performance.
- Budgeting encourages division of work among workers and specialization resulting to increased efficiency.
- Information provided in budget estimates helps decision makers to make well informed decision making.
- Budget enables management to compare the performance of different departments within its business.
Difference between a continuous budget and a perpetual budget
Continuous budget allows for revision of information contained in the budget once the period of twelve months has just ended. Perpetual budget, on the other hand, is usually extended continuously after the end of each year's reporting.
What is a self-imposed or participative budget?
It is a budget that involves participation of managers at different levels of management through sharing of their budget estimates.
Definition of variance analysis cycle
Variance analysis cycle refers to different steps carried out by management to examine performances of different policies within its business. It involves conceiving of questions, explanations and conducting operations to determine variance.
What is management by exception?
It refers to the practice of identification of tasks or information that leads to deviation from the intended target of the business. It is used to investigate the cause of the problem and finding ways of solving it.
Advantages of decentralization
- Encourages growth. Expansion of business to different geographical location creates new market for business products resulting to increased sales and profitability.
- Easy supervision of workers. Decentralization enables management to exercise better control and supervision of workers since each executive has manageable subordinates to supervise.
- Faster decision making. Decentralization facilitates faster decision making processes since management is brought closer people thereby eliminating hierarchy in decision making.
- Motivation of workers. Decentralization allows workers to participate in decision making of the firm thus boosting their attitudes towards the firm. Success of the firm motivates them since they are involved in decision making processes.
Disadvantages of decentralization
- Difficulties in co-ordination.The problem of co-ordination of activities is likely to occur since decentralization encourages spread of power within an organization.
- Less control. Decentralization makes top managers exercise direct control of the company but delegate responsibilities to their junior. Business may suffer high consequences as a result of less control.
- Increased financial burden. Effective decentralization requires employment of new workers or training of old workers; this leads to increased spending by firms or organizations.
- Conflict of interest. Managers operating within different locations are required to work towards a common goal of the firm. Conflicting decision making can lead to firms incurring huge loses.
Difference between manager of a profit center and manager of investment center
Managers in profit centers exercise authority over production capacity and sales volumes a firm should implement. They decide on the products the firm produces the quality and prices. Managers, on the other hand, are responsible in execution and implementation of actions related to production, sales, working capital and physical assets within an organization.
Reasons for isolating relevant costs
- It is very hard to have all information required to calculate detailed financial statements for the available alternative costs.
- There is the possibility of confusion arising when relevant costs are mixed with irrelevant costs.
