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Chapter nine.docx

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Rotman Commerce
Stojanovic Dragan

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 period.  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 accomplished 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 organizational policy  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 directed 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  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 slack  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 realistic budget  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 budgets  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 budgeting. 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 sales promotions  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
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