AccountingRevision - Master A-Level Accounting with AI

Benefits and Limitations of Budgeting

Benefit	Explanation
Control	Compares actual results to budget; highlights overspending or shortfalls
Planning	Forces managers to plan ahead and allocate resources before the period starts
Communication	Communicates targets and expectations to all departments
Co-ordination	Ensures all departments work together towards shared goals
Motivation	Gives employees clear targets to aim for; can drive performance
Performance evaluation	Provides a basis for assessing how well managers and departments have performed
Aid to decision making	Budget data informs decisions about pricing, staffing, expansion, etc.

Limiting factors — a scarce resource (e.g. labour, materials) may constrain the budget before it is finalised
Unrealistic / unachievable targets — if the budget is set too high, it demotivates staff
Too low — if targets are too easy, staff lose motivation and efficiency drops
Restrictive — rigid budgets may prevent managers responding to changing conditions
Inefficiency — managers may spend up to the budget limit to avoid cuts next year
Inflexible — a fixed budget does not adjust when actual activity levels differ from forecast
Based on estimates — budgets are predictions; unexpected events make them inaccurate
Time-consuming — preparing detailed budgets requires significant management time