1
Introduction
Budgets are very useful tools that management can use to control the performance of a
business unit or department. Budgets help management control in order to make timely
adjustments regarding material or financial performance. But budgets are only useful if they are
accurate and periodically checked, preparing a budget that overestimates expenses makes no
sense.
Advantages of using budgets
Budgets are both control and decision tools. The purpose of a budget is estimate future
revenues and expenses. The whole point of preparing a budget is that you can use the budget to
control the performance of the organization. For example, if sales are below expected, managers
can analyze why this is happening and make changes in order to reverse this situation and
increase sales. Or if costs are higher than budgeted, managers should try to determine the why
this happened and how it can be corrected. This is why a budget is only useful if it is accurate
since inserting random values is just as useful as doing nothing.
ABC’s budgets
The budget prepared by ABC’s management really doesn’t make any sense since it
forecasts a 15% increase in sales and a 20% increase in all the expenses, except for training and
utilities expenses. Costs never increase uniformly since many costs are fixed. Even taxes were
estimated to increase by 20% when the company should actually earn less money. It makes no
sense at all, and even considering the employees which apparently are not expecting a raise.
Even though raises are generally a few percentage points, they tend to occur every year. This
budget was intentionally prepared in order to show that ABC’s managers are performing their
Introduction
Budgets are very useful tools that management can use to control the performance of a
business unit or department. Budgets help management control in order to make timely
adjustments regarding material or financial performance. But budgets are only useful if they are
accurate and periodically checked, preparing a budget that overestimates expenses makes no
sense.
Advantages of using budgets
Budgets are both control and decision tools. The purpose of a budget is estimate future
revenues and expenses. The whole point of preparing a budget is that you can use the budget to
control the performance of the organization. For example, if sales are below expected, managers
can analyze why this is happening and make changes in order to reverse this situation and
increase sales. Or if costs are higher than budgeted, managers should try to determine the why
this happened and how it can be corrected. This is why a budget is only useful if it is accurate
since inserting random values is just as useful as doing nothing.
ABC’s budgets
The budget prepared by ABC’s management really doesn’t make any sense since it
forecasts a 15% increase in sales and a 20% increase in all the expenses, except for training and
utilities expenses. Costs never increase uniformly since many costs are fixed. Even taxes were
estimated to increase by 20% when the company should actually earn less money. It makes no
sense at all, and even considering the employees which apparently are not expecting a raise.
Even though raises are generally a few percentage points, they tend to occur every year. This
budget was intentionally prepared in order to show that ABC’s managers are performing their
