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Sunday, 16 June 2013

Budgeting and budget cotrol


Budget



A budget is a formal quantitative expression of management plans.

Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revunue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget



Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.

The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting



The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departements of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).


Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs. 


The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.



Budgets can be made flexible so that cost estimates are in relation to the output produced.



Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results. 



Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.



These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.

References



Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.


Originally posted in
http://knol.google.com/k/budget-budgeting-and-budgetary-control

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