Advantages of budgeting and budgetary control
Budgeting is obviously a sensible thing for a business to do because it controls how much money a business should be spending on rent, wages etc. If departments keep to the budget or spend less than they actually can then the company in this case Legend T-shirts should have a favourable variance depending on how many sales they make. Legend T-shirts had anticipated to spend £80,000 on fixed costs and £72,000 on variable costs which has a total of £152,000. They actually spent £79,000 on fixed costs and £54,000 on variable costs with a total of £133,000. This means they organised the budget control correctly as only heating and lighting spent over their budget but misc spent less so it all worked out. The problem was they didn’t sell enough so this isn’t the fault of budgeting the blame will fall on sales & marketing. The whole point of budgeting is to compel the management to think about the future they need to make sure they are achieving targets and this is for every department they should aim to keep their expenditure the lowest they possibly can. The one expense in Legend T-shirts that didn’t achieve its target was heating and lighting the one expense that overachieved was misc as they lowered their total costs by a £1000. This whole thing enables them to see what they’re doing wrong and how they can improve their budgeting for the future.
Coordination & Communication
Budgeting promotes coordination & communication because the senior management will have to coordinate & communicate with departments about their future plans, and how they intend to manage the budget, and how much each department should get to spend. This also lets them know how much they should be spending on all the resources. Coordination is essential in every business as poor coordination can lead to errors which affect the business.
Communication is essential so everyone in their respective departments knows how things are going to be structured. The business needs to communicate correctly and effectively to make sure everyone knows how they should use their budget in this case. Miscommunication however can lead to errors and can affect the business; an example of a miscommunication is for example in the budgeting department they could miscommunicate the budget for the marketing department and this could cause them to over spend. This will have a bad impact on the business because they have miscommunicated information which could affect the businesses revenue/profits causing the business to make a loss. An example of effective communication is where budgeting effectively tell the departments how much they should spend on each expense. This is great for the business especially if everyone keeps to the budget. This is because the aim of budgeting is to keep the costs low to keep the breakeven point as low as possible.
Coordination is essential in most businesses it is the senior management’s role to coordinate the budgets and make sure everything is done appropriately and in the correct way. The senior management of Legend t-shirts coordinated wrongly with the department or function which was in charge of the heating and lighting expense this caused the business to make a loss.
Responsibility
Budgeting clearly defines the areas of responsibility tells everyone how much they need to spend and on what and they are required to stick to the budget and try to get costs lower. They will require managers for the budget that are responsible for the achievement of budget targets and for the operations under their personal control. Legend T-shirts need to make sure they are responsible with their money by this I mean sticking to their budgets. For example finance should only spend a certain amount of money on the T-shirts/resources/rent etc. This is to
