Explain the purpose and nature of budgeting process?

Answer 1

3.1 Purpose and nature of budgeting process adopted

Budget is a monetary plan of a department, project, or organization that estimates probable income and expenditure of a specific period. From government, large corporation to small company, family or individual prepare budget. Purpose of budget:

• Estimating future income, expenditure and obviously profitability
• Providing a financial framework to managers for decision making
• Another purpose of budgeting is to help managers to compare the estimated output with actual performance

Nature of budgeting process adopted in the case:

1. Estimated the financial environment on the basis of last budget
2. Determined the probable amount of cash will be generated from sales or other activities
3. Defined the required expenditure such as raw materials,labors, production overheads and advertisements.
4. Then subtracting estimated expenses from estimated revenues. Whether the budget is surplus or deficit is determined.
5. After review and revised then final budget is submitted.

After the budget period ending, then estimated results are compared with actual result. Actually budgeting process may be differs from budget to budget, company to company.