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Question

Refer to the following information to answer the next 4 questions (Q 23 to Q 26) A budget is a financial blueprint that plays a fundamental role in the strategic management of finances for individuals, businesses, and governments. It serves as a comprehensive plan, projecting anticipated income and allocating funds to various expenses over a specific period, typically a fiscal year. The primary objectives of a budget are multi-faceted. It serves as a planning tool, enabling the establishment of financial goals and the systematic allocation of resources to meet these objectives. Moreover, budgets provide a framework for financial control by allowing individuals and organizations to compare actual financial performance against the budgeted figures, facilitating adjustments and corrective measures as needed. Beyond control and planning, budgets foster financial accountability and transparency. They create a structured approach to financial decision-making, aligning expenditures with priorities and strategic objectives. A well-constructed budget encourages financial discipline by setting clear expectations and promoting responsible resource management. It also serves as a communication tool, ensuring that stakeholders within an organization are on the same page regarding financial expectations and constraints. Furthermore, budgets contribute to emergency preparedness by allocating funds for unforeseen circumstances, thereby enhancing financial resilience. They facilitate goal alignment, directing financial resources toward achieving specific targets, whether it be saving for a major purchase, reducing debt, or investing in growth opportunities. In addition, budgets support effective debt management by incorporating debt repayment into the financial plan. They also play a crucial role in performance evaluation, allowing for regular assessments of financial results and the adjustment of strategies and goals accordingly.

Based on level of activity or capacity utilization, there is a type of budget which is prepared keeping in mind one level of output. It is a budget which is designed to remain unchanged irrespective of the level of activity attained. Identify it among the following:

A Flexible Budget Correct Answer Incorrect Answer
B Fixed Budget Correct Answer Incorrect Answer
C Functional Budget Correct Answer Incorrect Answer
D Budget Centre Correct Answer Incorrect Answer
E Master Budget Correct Answer Incorrect Answer

Solution

Based on level of activity or capacity utilization, budgets are classified as follows: Fixed Budgets – is prepared keeping in mind one level of output. It is a budget which is designed to remain unchanged irrespective of the level of activity attained. If actual output differs from the budgeted level of output, variances arise. Flexible Budgets – It is designed to change in relation to the level of activity attained. Flexible budgets are prepared in those companies where it is extremely difficult to forecast output and sales with accuracy.

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