Page 115 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 6.2.1 Objectives of Budgeting

The main objectives of budgeting are:
(i) To obtain more economical use of capital.
(ii) To bring about coordination between different functions of an organisation.

(iii) To plan and control the earnings and expenditure of the organisation.
(iv) To create a good business practice by planning for future.
(v) To ensure the matching of sales with production.
(vi) To fix departmental responsibilities on different department managers.
(vii) To prevent wastages or losses and reduce the expenditures, and

(viii) To ensure the availability of working capital in the organisation.

6.2.2 Advantages and Disadvantages of Budgeting

The advantages of budgeting are as follows:
(i) Budgeting helps in solving problems in a disciplined manner.
(ii) Budgeting helps in feeling of cooperation and understanding between different
departments.
(iii) Budgeting is a process of self-examination and self-criticism which is essential for the
success of any business or enterprise.

(iv) Budgeting enables the organisation to review and restate its fundamental goals, policies
and procedures.
(v) It sets responsibilities of employees in relation to each function of business.
(vi) It forces the management to keep adequate and correct historical data in the business.

(vii) It helps the organisation to plan well in advance for mobilising resources needed for
achieving its goals.
(viii) As the performance of managers is measured against budgets, they are motivated to
accomplish high performance.
(ix) Budgeting is that there is an improvement in communication moreover, it also leads to
proper coordination, and
(x) Another advantage is that if facilitates management by exception. This is done through
variance analysis.

Limitations of Budgeting

The main limitations of budgeting are as under:

(i) Budgeting is a costly affair for business organisations.
(ii) Budgeting is not a substitute for management.
(iii) Budget plan is based on estimates.
(iv) Budget execution is not proper and automatic, and
(v) A budget should not have more details than is necessary as it leads to complications.

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