Budget
a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.
Budgeting
The act of preparing a budget.
Budgetary Control
The use of budgets to control an organization’s activity.
Planning
involves developing objectives and preparing various budgets to achieve these objectives.
Examples of Planning
*Sales and Earnings Goals
*Capital Projects
*Reorganizations
*Cash Management
Control
involves the steps taken by management that attempt to ensure the objectives are attained.
Examples of Control
*Tracking, monitoring and reporting results
*Assign individuals or teams for accountability
*Basis of management bonuses
In order to be effective.....
must have both planning and control.
Advantages of Budgeting
*Define Goals and Objectives
*Think about and plan for future
*Means of allocating resources
*Uncover potential bottlenecks
*Coordinate Activities
*Communicate Plans
Responsibility Accounting
Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent
Annual Operating Budget
may be divided into quarterly or monthly budgets. (Usually done in thousands of dollars).
Participative Budget
is prepared with the full cooperation and participation of managers at all levels.
Advantages of Self-Imposed Budgets
*Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management.
*Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
*Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above.
*A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this explanation.
Management Guidlines may include...
*Expense inflation assumption
*Merit increase assumption
*Market share goals
*Payroll benefits
*Headcount targets including temporary personnel
*Expense targets (e.g. travel)
In Human Factors of Budgeting, the sucess of budgeting depends upon 3 important factors.
*Top management must be enthusiastic and committed to the budget process.
*Top management must not use the budget to pressure employees or blame them when something goes wrong.
*Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.
*Inter-relationships of charges and expenses are clear and appropriately reflected.
Budget Committee
responsible for
overall policy matters relating to the budget
coordinating the preparation of the budget
Sales Budget
*Prepared by sales and marketing personnel with overall guidance from top management
*Includes units (production) and dollars (collections and income statement)
*Includes pricing strategies
