There are various strategies that are utilized to control budgets.Through managing budgets organization put themselves in better positions for the financial forecasts. The strategies include the following
• Zero based
• Activity based
• Performance based
• Cost variances and benchmarking
Zero based budgeting is where expenses are analysed in the organization and the need and cost for each is justified.This strategy of budgeting results in efficient allocation of resources since its based on needs and benefits rather than history. It helps managers to find cost effective ways to improve operations.
Activity based costing is the gathering of ...view middle of the document...
Some companies pay incentives to heads of department who make huge savings on their allocations.
What causes Budget variances
There are four major reasons that lead to budget variances. The reasons are
1. Faulty arithematic in the budget figures
2. Errors in the arithematic of the actual results
3. Reality is wrong
4. Differences between budget assumptions and actual outcome
The four reasons outlined above will be explained in detail below.
It is highly possible to have an error in the budget, this may be commission or duplication a typical example is where the budget assumed and stated that no overdraft would be necessary and then due to circumstances beyond control its now required because the sales forecast was used to predict cashflow-inflows rather than rather than debtor payments. There are two possibilities to solve this scenario either go to the bank and request for an overdraft or take some other action to improve cashflow to stay within the budget cash figure.
Another reason for budget variance is for...