Question

Describe (120–150 words) how budget assumptions operate over time, what makes the best budget assumptions and what happens when they become invalid.

Answer 1

Budgets are always prepared for future and future is uncertain. Therefore we have to make certain assumptions about budgets. These assumptions may or may not become valid due to changing conditions in market and economy. These budget assumptions will be changing over period of time and it will not remain the same for a longer period. When making the budget, assumptions have to be made for the internal and external conditions of the business. Various sensitivity analysis has been done for reviewing different scenarios and after evaluating the effects of various alternatives forecast has been prepared. The best budget assumption will actually remain for a longer period of time than invalid assumptions. Invalid assumptions will not remain effective for a longer period of time and these assumptions will be wiping out in a short span of time.