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What is role of accounting information in budgeting ? If the production cost is over budget and sales is under budget is management to be solely blamed ? Could it be due to wrong input of accounting information? Is flexible budget better than a fixed budget?
BUDGET
A budget is a plan expressed in quantitative, usually monetary term, covering a specific period of time, usually one year. In other words a budget is a systematic plan for the utilization of manpower and material resources.
In a business organization, a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets.
Capital budgets are directed towards proposed expenditures for new projects and often require special financing. The operating budgets are directed towards achieving short-term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental of functional budgets.
BUDGETARY CONTROL
No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organization with the help of budgets is known as budgetary control. The process of budgetary control includes:
1. Preparation of various budgets.2. Continuous comparison of actual performance with budgetary performance.3. Revision of budgets in the light of changed circumstances.
A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Budgetary control is an important device for making the organization. More efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives.
Budget
An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another.
The process for preparing a monthly budget for your business includes:
Listing of all sources of monthly income, including sales and interest
Listing of all required, fixed expenses, like rent/mortgage, utilities, phone
Listing of other possible and variable expenses.
Problems in budgeting
Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms.
1. Budgets can be seen as pressure devices imposed by management, thus resulting in:
a) bad labour relationsb) inaccurate record-keeping.
2. Departmental conflict arises due to:
a) disputes over resource allocationb) departments blaming each other if targets are not attained.
3. It is difficult to reconcile personal/individual and corporate goals.
Budgetary Control
The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis of its revision.
Or in simple words, budgetary control is implementing budgets and making managers responsible for implementing it.
Essentials of Budgetary control:
1. Establishment of budgets for each function and section of the organization.
2. Continuous comparison of the actual performance with that of the budget so as to know the variations from budget and placing the responsibility of executives for failure to achieve the desires results as given in the budget.
3. Taking suitable remedial action to achieve the desires objective if there is a variation of the actual of the actual performance from the budgeted performance.
4. Revision of budgets in the light of changed circumstances.
Budgetary control and responsibility centres;
These enable managers to monitor organisational functions.
A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.
There are four types of responsibility centres:
1. Revenue centres
2. Expense centres
3. Profit centres
4. Investment centres
shortly without budgetary control for the budget the budget useful the budget is a tool to achieve the gools
A budget is a finacial statement of the business plan. It outlines in a time line (usually monthly) revenue from forecasted sales (demand), expenses to produce the targeted sales (supply), and funding to pay for investments or negative cash flows. In this process slaes and marketing provides the sales forecast, production provides the production plan outlining target production, purchasing provides material costs, and finance provides cost estimates and other indirect business costs.
Although each business unit is responsible for the data they provide, management is accountable for any variations.
Historically, budgets were prepared annually and fixed for the year. In todays changing world rolling budgets are the norm. Here budgets are reviewed (mainly quarterly) and adjusted according to the state of affairs. This usually inline with rolling forecasts where forecasts are reviewed and variances are accounted for.
