Budgeting is effective in dealing with unanticipated expenses and emergencies. Once a plan is in place it can be used for measuring the progress of goal achievement (Freedom Debt Management, n.d.; College of Business Administration, 2008).
At the time of preparing the budgets it is important to categorize the expenses such as fixed expenses, variable expenses and discretionary expenses. The discretionary expenses are not absolutely necessary for business survival. Necessary adjustments are done in these form of expenses i.e. they are reduced to honour the other types of expenditures.
In any business there are two types of costs discretionary costs and non-discretionary costs. It is easy to understand the discretionary costs like payment of rent or electric bill but the discretionary costs are less clear. The discretionary costs include the alteration, construction, research and development etc. Besides the discretionary and non-discretionary costs there are other types of costs such as controllable and uncontrollable costs. So a budget comprises of costs that are discretionary, non-discretionary, controllable and uncontrollable (Cotts & Rondeau, 2004, pp. 59).
Budget conveys the authority of the manager to allocate a specified amount on the items that are enlisted in the budget. The appropriations in the budget act as the benchmark for a comparison with the costs that are actually incurred. Expenditures of a budgeted category are matched with the pre-set amounts in deciding any over or under spending of funds and if needed corrective action are initiated (KU School of Social Welfare, n.d.).
For the control of discretionary costs the top management must translate the policies and objectives that it considers vital for the organizational success. The management then must make a plan of the spending relating to the discretionary activities that will help in achieving the defined business objectives. There can be