Chapter nine: Budgeting
The basic framework of budgeting
The definition of budgeting
A budget is a quantitative plan for the accusation and use of financial and other resources over a specified future time
The act of preparing a budget is called budgeting
The use of budgets to control in firms activities is known as the budgetary control
The master budget is a summary of a company’s plan that sets specific targets for sales, production, distribution, and
financing activities Culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet
Represents a comprehensive financial of inspection of management’s plan for the future and these plans are to be
Budget’s dual role: planning and control
Planning involves developing our objectives and preparing various budgets to achieve these objectives
Control involves steps taking by management to increase the likelihood that the object is there a lot of the planning
stage are achieved arms to ensure that all parts of the organization function a Vietnam are consistent with
An effective budgeting system provides for both planning and control and good planning without affecting control is a
time a wasted so, unless the plants are laid down in advance, there are no objectives toward which control can be
Advantages of budgeting
Managers usually will have informal plans even before they become involved in developing their budgets The
budgets process provides a mechanism for quantifying the financial consequences of these parts
Companies realize many benefits from a positive program:
1. But it’s communicates management’s plants throughout the organization, leading to a better understanding of all
employees of organization’s goals and objectives
2. But its force managers to think about and plan for the future. In the absence of the necessity to prepare a budget,
many managers would spend considerable time dealing with daily emergencies
3. But the budgeting process provides a means for allocating resources to those parts of the organization where they can
be used most effectively and are most needed The budgets prepared by managers are request for the resources
needed to run their operations
4. The budgeting process can uncover potential bottlenecks (a machine, activity, or process that limits total outputs
because it is operating at capacity) before they occur, by identifying the demands that will be placed on all key
activities and processes. If necessary, changes can be made to meet the budgeted level of activity on a timely basis
5. Budgets coordinate the activities of the entire organization by integrating the appliance of the various areas.
Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
6. Budgets defined goals and objectives that can serve as its benchmark for evaluating subsequent actual performance.
Periodic comparison of actual results to budgeted amounts allows management to determine whether the
organization’s worlds are being met and to take corrective action if necessary
Responsibility accounting is a system of accountability in which managers are held responsible for those items of
revenue and cost over which they can exert significant influence—and only those items. Managers are held
responsible for differences between a budgeted and actual results
Being held responsible for cost does not mean that the manager is penalized if the actual results do not measure up
with the budgeted goals, however, the manager should take the initiative to correct any unfavorable discrepancies,
should understand the source of significant favorable and unfavorable discrepancies, and should be prepared to
explain the reasons for discrepancies to top management
The point of an effective responsibility system is to make sure that nothing false through the crack, that’s the
organization react quickly and appropriately to deviations from its plants and that the organization leads from the
feedback it gets by comparing budget goals to actual results. Choosing and budget period
Operating budgets formerly cover in one year. Corresponding to the company’s fiscal year
Many companies divide their budget year into four quarters. The first score is then subdivided into months and one
tree budget takers are established. The last three quarters are carried in the budget at quarterly totals only.
As the year progresses, the figures of the second quarter are broken down into monthly amounts, then the third
quarter figures of broken down to and so forth.
A continuous or perpetual budget is a 12 month budgets that rules forward 1month or quarter as the current month
or quarter is completed
This approach is always keeps managers focused at least one year I had so that they do not become too narrowly
fixated on short-term results
The participative budget
Participative budget: a method of preparing budgets in which managers prepare their own budget estimates. These
budget estimates are then reviewed by the manager supervisors, and any issues are resolved by mutual agreement,
leading to a complete budget.
** exhibits 9.1: the initial flow of budget data in a participative budgeting system**
Participative budgets have a number of advantages:
1. Individuals at all levels of the organization are recognized as members of the team was views and judgments are
valued by top management
2. Budget estimates prepared by frontline managers are often more accurate and reliable than estimates prepared by a
top managers will have less detailed knowledge of market factors and day to day operations
3. Motivation is generally higher when individuals participating in setting their own goals than when the goals are
imposed from about. Participative budget it create commitment to attain that goal
4. A manager who is not able to meet a project that has been imposed from above can always say that the verdict was
unrealistic and impossible to meet. With the purchaser. Budget, this excuse is not a available.
If no system of checks and balances is present, participative budgets may be to lose and allowed to march budgetary
Budgetary slack: the difference between the revenues and expenses in manager believes can be achieved and the
amounts included in the budget. Slack and will exist when revenue budgets are intentionally set below expected
levels and expense budgets are set above expected levels
Managers may attempt to create slack in an attempt to increase the likelihood of obtaining rewards that are content
on meeting or being the budget or to reduce how hard they have to work during the period to attain their budgets
Slacks can result in the misallocation of resources, inefficiencies, waste, and less effort by managers. Therefore, the
firm budgets are accepted, they must be carefully reviewed by immediate supervisors
Each level of responsibility in an organization should contribute in a cooperative effect to develop an integrated and
Budget committee: a group of key management personal responsible for overall policy matters related to the budget
program, coordinating the comparison of the budget, handling disputes related to the budget, and approving the final
Committee membership usually consist of the president or CEO, heads of functional area and the controller
The process of assigning or imposing budgets is often more efficient since it typically does not involve negotiations
between managers and some coordinate, which can take a considerable amount of time and effort.
Behavioral factors in budgeting
Whether or not a budget program is accepted by lowering management personnel will be reflective of 1) the degree
to which top management accepted the budget program as and final part of the company’s activities and 2) the way in
which top management uses budgeted data.
If a budget program is to be successful, it must have the complete acceptance and support of the persons who
occupied key management positions
Preoccupied with the technical aspects of the budget to the exclusion of the behavioral aspect can demotivate
employees and it would be the focal to coordinate their efforts
An important object if it is that the budget is designed as a positive age in achieving both individual and company goal Stretch budget: a budget that is highly difficult to achieve. Attainment of stress budgets often requires considerable
changes to the waiting past the activities are performed.
If difficulty level of budget targets become even more important when managers bonuses are based on meeting or
exceeding the budget. Under these commonly employed composition schemes and bonuses paid only if the budget is
met. Attainable budgets usually generates greater commitment to the budget and results in less undesirable behavior
by manager’s intent on earning their bonuses.
Zero based budgeting
Zero based budgeting a method of budgeting in which managers are required to justify all costs as if the programs
involved where the proposed for the first time
As a revised budget requires considerable documentation and the manager must prepare a series of decision packages
in which all of the activities of the department are ranked according to their relative importance and the cost of each
activity is identified
The higher level managers than review the decision packages and reduce those areas that appear to be less clerical or
whose cost that do not appear to be justified
Critics argue that properly executed zero based budgeting is too time consuming and costly to justify on an annual
basis. Also, they argued that the end will reduce can become mechanical, limiting the benefits of the zero based
The master budget: an overview
The master budget consists of a number of separate but interdependent budgets.
*** exhibit 9.2 the master budget interrelationships***
The sales budget: a detailed schedule showing the expected sales for coming period; these sales are typically
expressed in both the dollars and units
All of the other parts of the master budget are dependent on the sale budget.
The sales budget will help determine how many units will have to be produced; therefore, the production budget is
prepared after the sales budget.
The production budgets in turn is used to determine the budgets for manufacturing costs which includes the direct
materials purchases budget, the direct labor budgets, and the manufacturing overhead budget. These budgets. These
budgets are then combined with the dada from the sales budgets and the selling and administrative expense budget
to determine the cash budget
The selling and administrative expense budget is both dependent on and a determinant of the sales budget. This
reciprocal relationship arises because sales will in part to be determined by the funds committed for advertising and
The cash budget: a detailed plan showing how cash resources will be acquired and used over a specified time period.
All of the operating budgets have an impact on the cash budget
In the case of the sales budgets, the impact comes from the plants cash receipts to be received from sales. In the case
of other budgets, the impact comes from the plant cash expenditures within their budgets themselves
Sales forecasting—a critical step
The sales budget is usually based on the company’s sales forecast for example; sales from prior years are often used as
a starting point in preparing the sales forecast.
Managers will examine the company’s unfilled orders, the company’s pricing policy and marketing plants, and trends
in the industry, and a general economic conditions, an