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Administering the Budget

Administering the Budget

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Published by ClassOf1.com
A budget is a written financial plan for business operations developed for a specific period of time. Budgets are often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business. Because a budget is an estimate of what might happen, it usually cannot be followed exactly. Staying close to the amount budgeted is desirable.
A budget is a written financial plan for business operations developed for a specific period of time. Budgets are often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business. Because a budget is an estimate of what might happen, it usually cannot be followed exactly. Staying close to the amount budgeted is desirable.

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Published by: ClassOf1.com on Jul 10, 2013
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Finance
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Sub: Finance Topic: Budgeting
*
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
http://classof1.com/homework-help/finance-homework- 
Administering the Budget
A
budget
is a written financial plan for business operations developed for a specific period of time.Budgets are often developed for six months or a year but can cover a longer or shorter time perioddepending on the type of budget and the nature of the business. Because a budget is an estimate of what might happen, it usually cannot be followed exactly. Staying close to the amount budgeted isdesirable. However, for various reasons beyond the control of managers, actual income and expensesmay vary from the budgeted amounts. For that reason, managers often prepare three budgetestimates. The first estimate assumes that sales will be less than expected. The second estimateconsiders what most likely will occur. And the third estimate assumes sales will be better thanexpected. The second estimate the one most likely to occur is followed unless anticipated conditionschange. If sales are less than expected, the business can shift immediately to the first (lower) set of budget figures. Should sales be better than expected, the business can shift to the third (higher) set of budget figures. Having more than one budget estimate allows for realistic flexibility during budgetplanning. It also forces managers to consider what might happen under favorable and unfavorableconditions and to be better prepared for rapid changes.Whether a business is large or small or uses one or more budgets, managers must regularly use thebudget to monitor ongoing operations and control expenses. That monitoring activity determineswhether the business is on, under, or over budget. If expenditures exceed budgeted amounts,managers want to quickly understand why so they can make necessary changes. Some adjustmentsmay be easy, whereas others may not even be possible.
For example
, labor costs might exceedbudget estimates for the planned level of production because a number of new employees have beenadded who are not as productive as experienced employees. Additional training for those employeesmight help improve productivity, reducing the labor costs required to meet production goals duringthe rest of the budget period. However, if labor costs are higher than the budget because of an
 
 
Sub: Finance Topic: Budgeting
*
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
http://classof1.com/homework-help/finance-homework- 
unanticipated increase in the minimum wage paid to a number of employees, little can be done tolower those costs in the short run. If a comparison of actual operating performance with the budgetestimates reveals that the business will not make the expected profit or will have a loss, the managermust review the expenses to determine what can be done to reduce them. Some expenses may beeasier to reduce in the short run than others. However, cutting some expenses may lead to longer-term profitability problems.
For example
, if a manager tries to reduce costs in the short run by notpurchasing new inventory, those costs will need to be increased in the future to replace the inventoryor sales will be lost. Cutting the number of employees to save on labor costs may put too muchpressure on the remaining employees. Their productivity may go down or some may quit, leading toincreased costs to replace them.

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