A budget is a financial plan for future activities. The budgets used in business often include a sales or revenues budget detailed by products or services, production budgets, budgets for each department in the company, cash budget, capital expenditures budget, and others. The combination of all the budgets is referred to as the company’s master budget or profit plan.
Budgets help management decide which activities it will undertake and how the company’s resources will be used. If the budgeted income statement and balance sheet coming out of the master budget are not acceptable, management can make the needed changes before the year actually begins.
Budgets can also assist in controlling the actual costs, because managers realize that the costs of their activities will be compared to the budget.
The differences between the actual amounts occurring and the budgeted amounts are known as variances. These variances can also signal some new problems that need management’s attention.
