The Role of Budgetary Information in Performance Evaluation

Budgets are an accounting tool that companies use to plan future expenditures. Performance evaluation will often compare actual business expenditures to the budgeted amounts to determine how well the company met its goals.

Facts

Budgets are a constraint tool for many companies. It helps to limit the amount of capital spent on various items needed to run business operations. While most companies use a master budget, each department will typically have its own budget to measure expenditures.

Features

Performance evaluation in the budget process is commonly known as a variance analysis. Business owners or managers will review money spent against the budgeted amount and determine the reason for the variance. Variances are not bad if the company purchased more items to meet higher (often unexpected) consumer demand.

Considerations

Creating a budget is often a time consuming and arduous task. Most companies complete it annually, although the performance evaluation process is ongoing. Using an annual budget process typically provides better information when creating a new budget.

References

• Entrepreneur: Drafting Your Budget
• Cliffs Notes: Flexible Budgets