The advantages and disadvantages of budget setting Essay

Direct costs: those cost that can be straight traced to bring forthing specific goods or services. For illustration, the cost of leather in doing bags can be attributed straight to the cost of fabricating these merchandises. Depreciation and administrative disbursals, are more hard to delegate to specific merchandises, and so are non considered as direct costs.

Indirect costs: those costs that non straight related to the production of a specific good or service but that is indirectly related to a assortment of goods or services. Buying office furniture for bag fabrication house is one illustration of indirect cost because it does non impact the production of any one unit.

A cost can be direct cost of a section but it is indirect cost of the others. The categorization depends on which section the cost is involved in. For illustration, the wage of workers working in building site is a direct cost but the wage of directors pull offing this site is non direct cost, it is indirect cost.

Operating expenses: in concern, overhead disbursal refers to an on-going disbursal of runing a concern. All costs on the income statement are regarded as overhead disbursal except direct stuffs and direct labour disbursal. For case, depreciation disbursal, advertisement, insurance, rental fees, telephone measures, fixs, office supplies and public-service corporations costs are operating expenses.

Controllable and unmanageable costs:

– Controllable costs: costs that can be influenced by the section involved or directors are capable of commanding them.

– Uncontrollable costs: costs that directors can non act upon significantly or directors can non command them.

Measure the statement of the delegate

In my point of position, the delegate misconceived the footings used in the statement, so for this ground I strongly disagree with this statement.

Costss are assigned to be objects for a assortment of purpose including pricing, profitableness surveies and control of disbursement. Based on the intent of direction, the costs are classified as the followers:

For cost volume net income analysis or profitableness surveies, costs are divided into three classs fixed cost, variable cost and semi-variable cost.

For pricing, costs are classified into direct costs and indirect costs.

For control of disbursement, costs are divided into governable costs and unmanageable costs.

Because of the misconception about categorization of cost, the delegate used the footings in this statement wrongly.

Direct costs can be regarded as both fixed costs and variable costs.

As I have mentioned through the obvious illustration above, direct costs like the wage of workers working in building site is a fixed cost. Every month, the company has to pay the fixed rate wage for the workers harmonizing to the coloured labour contracts they have made. On the other manus, most of variable costs such as direct input stuffs, direct labour per unit are direct costs.

Indirect costs can be either fixed costs or variable costs.

In contrast with direct costs, most of indirect costs are fixed costs, for illustration the lease fees for representative offices, sale section and the security cost. These costs do non straight attribute to fabrication merchandises therefore they are indirect and fixed costs. On the other manus, labour costs can be indirect as in instance of care forces or executive officers.

Controllable and unmanageable costs:

For control of passing intent I have mentioned above, costs are classified into governable and unmanageable costs that represent the degree of direction in a term.

When you have authority to choose the input stuffs, the methods and staffs, the aggregation can be regarded as governable costs. If you made a multi-year understanding to contract for aggregation at fixed twelvemonth fees, the cost can be unmanageable. In lower direction degrees, the director does non hold plenty prima accomplishments so with any type of costs the director can non command which becomes unmanageable cost. In contrary, in the higher direction degree, both fixed costs and variable costs can be under controlled.

Participative budgeting is the state of affairs in which budget are designed and set after input from subsidiary directors, alternatively of simply being imposed. The intent of engagement in budget scene is to split duty to subordinate directors and put a signifier of personal ownership on the concluding budget. The budgeting attack in which the subsidiary participates in budget scene, they provide their ain information that the supervisors use to explicate the ego – imposed budget or participative budget ( Chapman, Hopwood & A ; Shields, 2006 ).

Organization public presentation is expected to be good improved by doing it possible for the supervisor to apportion the resources more expeditiously. Harmonizing to the information provided by the subsidiary, the right resources-allocation determinations are doing, the participative budgeting will better the organisation public presentation.

Engagement in budget scene has its desirable effects on an organisation public presentation these include the transference of information from subsidiary to superior so that it can increase subsidiary ‘s occupation satisfaction. In add-on, its advantages contain budgetary duty and higher motive to accomplish the ends. Besides the desirable effects, participative budgeting has its unwanted effects these include clip consuming, embroidering the budget. However, the status which determines the success of a participative budget depends on assorted factors such as occupation related information, the degree of engagement, the degree of low-level influence and complexness of budget.


Transfering information from subsidiary to superior is one of the participative budget scene advantages. Subordinates have chances to reach straight to the superior and discuss organisational issues with the higher-ups so that they can interchange the information and thoughts can work out the jobs and unite future point of positions. The transferal of information is peculiarly of import when high hard undertaking is being trade with, the more hard the undertaking is, the greater the demand for subsidiary ‘s audience. In add-on, when people participate in puting a budget, they are recognized as members of a squad, they portion budgetary duty and motive is higher when they together accomplish their ain ends instead than the ends are imposed.


Besides the desirable effects, participative budgeting has its unwanted effects for an organisation. Time consuming is the biggest disadvantage of engagement in budget scene. Vacillation and hold can be made when excessively many meetings are hold. Budgetary slack is another unwanted consequence, happens because of overestimate of disbursal that can further budgetary “ gambling ” through budgetary slack. Unless inducements to accurate undertakings are provided, embroidering the budget can be terrible.


When existent monetary values or use of inputs are higher than standard monetary values or use, unfavourable discrepancy will happen. When opposite occurs, it will take to favourable discrepancy. Variance ever exists unless the undertaking program is absolutely executed. Both unfavourable and favourable discrepancies are non tantamount to good and bad discrepancies. Normally, whether discrepancies are good or bad depends on why they occurred. Significant variances inform direction that something demands to be examined.

In fact, it is rare when fabricating public presentation is precisely the same as the established criterions and it will non be expected. Random fluctuation around the criterion are expected. In order to cover with a divergence between program and existent, for each company, the directors should set up an acceptable scope of public presentation. The acceptable scope is the criterions of allowable divergence. When a discrepancy occurs, if it is in this scope, it is assumed to be caused by random factors. If a discrepancy occurs outside this scope, the divergence is likely to be caused by non-random factors. Non-random factors include both of governable and unmanageable instances. In the non-controllable instance, directors need to revise the criterions. Based on experiences from past, intuition and judgement, directors determine the allowable divergence from criterions.

Fixed costs are costs that remain changeless, in entire, irrespective of alterations in the degree of activities. Despite the activity degrees addition or lessening, the fixed costs are still the same, in entire, if other outside factors like monetary value alterations do non happen. However, fixed costs will be changed on per unit footing. Fixed costs can be viewed as being committed for anterior determination or contract. In the other words committed fixed costs are costs that relate to the investing in installations, equipment every bit good as depreciation and the basic organisational construction of a house. In add-on, contract for enrolling employees such as the wages of directors and supervisors are besides committed fixed costs.

Uneven gross flows indicate the state of affairs that a company has to cover with when clients show their high or low demand for merchandises or services which the company provides. Actually, uneven gross flows can be predictable and depend on the period of clip in a twelvemonth. Travel companies and hotels are typical of uneven gross flows because tourers are simply occasional clients. It is obvious that in the summer a travel company has the biggest figure of clients than other grounds. Besides, a swim suit store has high degree of demand in the summer and there is hardly demand in the winter or spring.

An executive has asserted that many costs of their costs are committed fixed costs so it is likely to hold a high interruption – even point. It means that before acquiring net incomes, the company has to run at high degree but when it pass the interruption – even indicate its net income will raise quickly because of the addition in gross taking to a high P/V ratio.

There are 2 ways to raise net income, one is increase gross and another one is lessening costs. In short period of clip, net income will non be much influenced by these committed fixed costs. Therefore, in position of seting the costs, the executive should send on to gross side of concern. Net income will be maintained at sensible degree if the gross is achieved above the break-even degree.

Concentrating on deriving gross, peculiarly during the periods of low degree of demand, the company should capitalise all the chances. Taking a flexible attack, the company offers the monetary value of the merchandises or services to accommodate the state of affairs of the company and the monetary value the clients agree or willing to pay. When the company operates below the interruption – even degree, it can accept any monetary value higher than variable cost.

Unlike fabrication industry, leisure or touristry industry merchandises can non be stored. Normally, in fabricating industry in low degree of demand clip, they can fabricate merchandises for stock and does non necessitate to be flexible. For illustration, a fabric winter company whose chief merchandises are slipovers, woollen scarves, baseball mitts etc. Actually, these merchandises are provided to consumers in winter, summer is the low demanded season. Therefore, in summer the company does non concentrate on sale scheme but fabricating scheme to bring forth more merchandises fulfilling winter demand.

A flexible attack to pricing agencies put to deathing a pricing scheme in order to pull as much clients as possible when the market demand for merchandises or services that the company provides is low. The monetary value will increase in high-season or busy period. In this clip, the company expects to run with full capacity.

For illustration, in summer, people frequently go for going, demand for booking suites addition, therefore the hotel room monetary values are normally higher. Hotels have to run their full capacities to server tourers and visitants. Whereas in winter or spring when the figure of tourers and visitants is significantly decrease, hotels will offer the new lower monetary value or supply full bundle vacation with the publicity.