Budget

Raw material cost can change with production quantity. Link variable cost with activity in exams.

Comparing actual results with the budget reveals deviations in income, costs, or expenditure. Managers can analyse these deviations and take corrective action in time. Removing targets is not the purpose; the comparison helps control progress towards them. Exam tip: Remember the budgetary control sequence: comparison → deviation → corrective action.

Overestimating income can make expense planning wrong. Remember the importance of conservative estimation in exams.

A budget should be based on realistic estimates of both income and expenses. When expenses are estimated below their likely actual level, the organisation may approve too little money for its activities. This can create a shortage while paying suppliers, workers, or other operating costs. Underestimation does not make expenses disappear, guarantee higher income, or remove the need for records.

Option A is correct because insufficient planning funds may be available for the actual cost. For instance, if a repair is expected to cost 20,000 but the budget provides only 12,000, an additional 8,000 must be arranged later. This may disturb cash management and delay the work. A careful budget uses available information and past experience to make reasonable estimates. The supplied answer is therefore consistent and educationally appropriate.

A budget puts future work into numbers and limits. Understand budget as a practical planning tool in exams.