a) Purposes of Budget:

• Budget is an aid in making and coordinating short-range plans.
• It is a device for communicating these plans to the responsibility center managers.
• Budget is a way of motivating managers to achieve their responsibility centers’ goals.
• It is a benchmark for controlling on-going activities.
• Budget is a basis for evaluating the performance of responsibility centres and their managers.

(Any 3 points well explained @ 2 marks each = 6 marks)

b) Stages in the budgeting process:

1. Identify the principal budget factor (e.g., sales volume).
2. Prepare the functional budget or plan for the principal budget factor.
3. Prepare other functional budgets in logical sequence.
4. Submit the functional budgets to the budget committee for review and approval.
5. Prepare the master budget.
6. Submit the master budget and supporting functional budgets to the board for approval.
7. Communicate the detailed budgets to responsible managers.

(Any 6 steps for 6 marks)

c) Differences between Master Budget and Functional Budget:

• Master budget: A consolidation of various functional budgets, providing a comprehensive overview of the organization’s financial plan.
  • Advantages:
    • Coordination of all functional budgets.
    • Acts as a line of communication between various departments.
  • Disadvantage:
    • Based on forecasts, subject to uncertainties.
• Functional budgets: Budgets for individual functions like sales, production, etc.
  • Advantages:
    • Gives targets to individual managers.
    • More realistic and motivating as they are prepared by functional managers.
  • Disadvantage:
    • May conflict with organizational objectives if not properly coordinated.

(1 mark for definitions, 2 marks for advantages, 1 mark for disadvantage)