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Accounting Test 2 Chapter 8 Text Book Notes

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Department
Accounting
Course
ACCT 2101
Professor
All Professors
Semester
Winter

Description
AccountingTest2notes03202014CHAPTER8ROLEOFBUDGETSINORGANIZATIONSThreefunctionsofmanagementplanningleadingandcontrollingAlthoughtheseweredescribedasthreedistinctfunctionsofmanagementtheyarepartofanoverallprocessthatissometimesreferredtoastheplanningandcontrolcyclePLANNINGANDCONTROLCYCLEPlanningthefutureorientedpartoftheplanningandcontrolcycleduringwhichmanagerssetobjectivesorgoalsforthefutureDirectingleadingistheimplementationoractionphaseofthecyclewhenmanagersputtheplanintoactionControllingthebackwardlookingpartofthecyclewhenmanagerslookbacktodeterminewhethertheymetthegoalssetduringtheplanningphaseStrategicplanorvisionofwhatthemanagerwantstheorganizationtoachievelongtermThestrategicplanistheytranslatedintolongtermandshorttermobjectivesalongwiththetacticsthatwillbeusedtoachievethoseobjectivesAlongtermobjectiveisaspecificgoalthatmanagerswanttoachieveoverthelongtermtypically5to10yearsAshorttermobjectiveisaspecificgoalthatmanagersneedtoachieveintheshortrunusuallynolongerthanayeartoreachtheirlongtermgoalsTacticsarespecificactionsormechanismsmanagersusetoachievetheobjectivesAnimportantpartoftheplanningprocessisthecreationofabudgetadetailedplanthattranslatesthecompanysobjectivesintofinancialtermsItinvolvesidentifyingtheresourcesandexpendituresthatwillberequiredoveralimitedplanninghorizontypicallyayearwhichcanbebrokenintoshorterperiodsforexamplemonthsorquartersAlthoughthetypesofbudgetscreatedwilldifferdependingontheorganizationthebasicprinciplesarethesameBENEFITSOFBUDGETINGOneofthemajorbenefitsofbudgetingisthatitforcesmanagerstolooktothefutureInbusinessbudgetsforcemanagerstolookaheadandaddresspotentialproblemsForexampleabudgetcanhelpmanagersplanaheadtoensuretheyalwayshaveenoughcashonhandtopaythecompanysbillsorenoughinventorytoavoidrunningoutduringperiodofpeakdemandBudgetsalsoplayanimportantcommunicationrolewithinorganizationsTheyprovideamechanismformanagerstoshareexpectationsandprioritiesforthefutureBudgetsserveanimportantroleinmotivatingandrewardingemployeesBudgetsalsoprovideausefulbenchmarkforevaluatingandrewardingemployeeperformanceBEHAVIORALEFFECTSOFBUDGETSThewayinwhichmanagersandemployeesbehaveinresponsetobudgetsdependsinlargepartonhowgoalsandbudgetsaresetTwoconsiderationsareespeciallycriticaltherelativedifficultyofmeetinggoalsandthedegreeofemployeeparticipationinestablishinggoalsBudgetsthataretightandattainablearemorelikelytomotivatepeoplethanbudgetsthatareeithertooeasytotoodifficulttoachieveManagersmusttrytofindthejustrightlevelofdifficultyinsettingbudgetarygoalssothattheyhavemotivatingratherthandemotivatingeffectsonemployeebehaviorInvolvingemployeesatalllevelsoftheorganizationinthebudgetingprocessisalsoimportantParticipativebudgetingallowsemployeesthroughouttheorganizationtohaveinputintothebudgetsettingprocessThisbottomupapproachtobudgetingcanbecontrastedwithatopdownapproachTopdownapproachinwhichtopmanagementsetsthebudgetandimposesitonlowerlevelsoftheorganizationIngeneralaparticipativeapproachismorelikelytomotivatepeopletoworktowardanorganizationsgoalsthanatopdownapproachBudgetaryslackemployeesormanagerscandosobyunderstandingexpectedsalesoroverstatingbudgetedexpensesmakingitmorelikelythattheywilllookgoodbycominginunderbudgetforexpensesoroverbudgetforrevenuesManyofthedysfunctionalbehaviorscanbeminimizedbyimplementingthefollowingbudgetsettingguidelinesUsedifferentbudgetsforplanningthanforperformanceevaluationalthoughbudgetaryslackcanmakeplanningdifficultitprovidesawayformanagerstohedgeagainstuncertaintythatmayaffecttheirbudgetevaluationSomeslackcanbebeneficialparticularlyinorganizationsthatfacemajorfluctuationsindemandorcoststhatarebeyondthemanagerscontrolUseacontinuousorrollingbudgetapproachUndercontinuousbudgetingthecompanymaintainsarollingbudgetthatalwaysextendsacertainperiodintothefutureWhenonebudgetperiodpassesanotherisautomaticallyaddedattheendThisapproachkeepsmanagersincontinuousplanningmodealwayslookingintothefutureandhelosavoidthebudgetgamesthatareplayedattheendofabudgetperiodUseazerobasedapproachUnderzerobasedbudgetingtheentirebudgetmustbeconstructedfromscratcheachperiodratherthanstartingwiththelastperiodsactualresultsWhiletimeconsumingitmakesmanagersjustifytheirbudgeteachyearCOMPONENTSOFTHEMASTERBUDGET
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