The purpose and benefits of budgeting, the preparation of cash, sales and production budgets, budgetary control through comparison with actual results, and the behavioural effects of budgets.

What this dot point is asking

AQA wants you to explain the purpose and benefits of budgeting, prepare cash, sales and production budgets, use budgetary control by comparing budget with actual, and discuss the behavioural effects of budgets. This is unit 3.2.1, examined as both a preparation calculation (often the production or cash budget) and a discursive question on control and behaviour.

Purpose and benefits

Types of budget

The production budget formula is the most reliably tested calculation here: $\text{production} = \text{sales} + \text{required closing inventory} - \text{opening inventory}$. From production, the materials budget is found by multiplying by the material needed per unit (and its price), and the same logic gives the labour budget. The cash budget then collects the timing of receipts and payments, which links to unit 3.2.6.

Budgetary control

Behavioural effects

Budgets influence behaviour, for good and ill. Realistic, participative budgets, where managers help set their own targets, tend to motivate and build commitment. Imposed or unrealistic budgets can demotivate and provoke dysfunctional behaviour: spending the full allocation late in the year to avoid a future cut, building budgetary slack (padding estimates so targets are easy), or gaming the reported figures rather than improving real performance. A technically sound budget can still fail if it alienates the people who must meet it.

Try this

Q1. State two benefits of budgeting. [2 marks] For example it aids planning and provides control through comparison with actual results.

Q2. A budget of $15{,}000$ produced actual costs of $14{,}000$. State the variance and whether it is favourable. [2 marks] $1{,}000$ favourable, because less was spent than budgeted.