P1 Exam Dumps : Management Accounting

A fixed budget will provide meaningful control information when actual activity differs from budget and variable costs are significant.

If actual sales revenue is compared to a fixed budget it is possible to tell whether a favourable sales variance is due to an increase in units sold or an increase in sales price.

If sales volumes were well above budget, adverse variable cost variances will probably be reported, against the fixed budget, since more variable costs have to be incurred to support the higher level of activity.

Reporting against a fixed budget tells management nothing about the efficiency of operations.

If a flexible budget is prepared then the budget variances calculated will provide a better indication of performance since actual results will be compared against an appropriate benchmark.

The fixed budget however provides more insight into actual performance.

The budget acts as a variable mechanism, with actual results being compared with budget.

Budgeting forces an organization’s management to look ahead and set performance targets.

The budget provides an external benchmark against which performance against which performance can be evaluated.

The budget ensures actions of different parts of the organization are coordinated are reconciled otherwise managers take actions for the benefit of their own part of organization that may not benefit the organization as a whole.

Another benefit of budgeting is to set targets to motivate managers and optimize their performance.

The budget is a useful device of influencing an operator’s thoughts and motivating operators to perform in line with the organization’s marketing budget.

It provides a standard which managers may be motivated to achieve. It can also encourage inefficiency and conflict between managers particularly if the budget is imposed from above, whereby it may act as a threat rather than as a challenge.