Chapter 8, Problem 1Q

What is a budget? What is budgetary control?

To determine

To explain: The budget and budgetary control.

Introduction: A budget is a financial statement that includes the forecasted items for a particular period of time. Forecasted items include revenue, sales, profit and any other item that budget maker wants to include.

Answer to Problem 1Q

Solution:

• A budget is a financial statement that includes the forecasted items like revenue, sales and any other item.
• Budgetary control refers to the comparison of budgeted items and actual items and taking action to overcome them the difference between them.

Explanation of Solution

• A budget is a financial statement made for the purpose of knowing prospective revenue, expenses and any other items. Budgeting is used by the managers only and not reported to the external parties. In making a budget, certain assumptions are made in the starting like increase in the revenue, increase in the cost or any other assumptions. This assumption helps in making the budget. A budget cannot be made without the assumptions.
• A budgetary control refers to a process, in which the budgeted items are matched with actual items to know the difference between them and take action to overcome that difference, if difference is not good for the firm. Budgetary control is used by the companies to know about the factors that prove the budgeted estimate wrong. And management takes action on the factors which are unhealthy for the firm, so that firm may not lose revenue from that reason again.

Hence, budget includes the forecasted items for a particular period of time and budgetary control are used to take corrective action to overcome any problem.