Budget - Financial plan of the expected revenue and expenditure of an organisation for a given time period. Budgets are required to prevent reckless financial decisions and ensure the business stays on target to meet its objectives.
Planning and Guidance - Budgeting requires managers to forecast financial situations and anticipate financial problems before they occur, so that businesses can be better prepared to overcome problems.
Coordination - Budgeting enables managers to take control of how the business uses its capital, by making budget allocations for each department and project.
Control - Budgeting helps to limit business expenditure, and makes managers and budget holders accountable for their expenditure.
Cost Center - A department or unit of a business that incurs costs but is not involved in making any profit. Assigning a unit of the business as a cost center will make the managers of that unit aware and accountable for their contribution towards the total costs of production for the firm, thereby motivating them to practice better cost control.
Profit Center - A department or unit of a business that incurs both costs and revenues. Assigning a unit of the business as a profit center will allow management to identify the most and least beneficial units to the business’ finances, and the financial accountability motivates managers of units to practice better cost control and increase revenues.
Motivation - Managers of cost and profit centers are accountable for their department’s contribution to the costs and revenues of the organisation, motivating them to strive for better cost control and for improved productivity.
Aids Decision-Making - Management can identify the strengths and weaknesses of the organisation based on the positive or negative impact of each center, enabling management to focus investments on decisions that will improve the financial situation of the organisation.
Profit-Oriented - Departments are less likely to consider social responsibilities and ethical objectives if they are run as profit and cost centers, as the significant objective would be their financial contribution to the organisation.
Variance - The difference between the budgeted figure and the actual outcome. It helps managers control budgetary planning by investigating the causes of any variance.
Favourable Variance - When discrepancies between budgeted outcome and actual outcome are financially beneficial to the organisation.
Adverse Variance - When discrepancies are financially detrimental to the organisation, and either costs are higher than expected or revenue is lower than forecasted.