Textbook Problem

Define the term budget. How are budgets used in planning?

To determine

Explain the meaning of the term budget. Also, explain the manner in which budgets are used in planning.

Explanation of Solution

Budgets:

Budgets are prepared for the planning and controlling purposes. Budgets facilitate planning and making decisions to achieve the desired objectives and are prepared to enable comparison between actual and expected outcomes.

The manner in which budgets are used in planning process is discussed as follows:

• Budgets are prepared in accordance with strategic plans of an organization.
• Strategic plans are further categorized into short term and long term objectives.
• Budgets are prepared to achieve these objectives and to ensure that organization’s activities are in conformity with strategic plans.

Therefore, strategic planning of a company is ultimately executed with the help of budgets. Budgets provide expected outcome of operations and is used as means to control deviations. Activities at bottom level are conducted in a way to achieve budgets and consequently the strategic plans of the company.