This slide explains thoroughly covers the Budgeting chapter in cost & management accoounting

1. 1
Budgeting
Planning for Future Success Through
Effective Resource Allocation

2. 2
Budgets
 Quantitative and/or financial plans
 Should focus activities/resources on goals
 “What do we need to accomplish the goal?”
 Not “How much are we allowed to spend?”
 Focus should be on overall organizational
goals, not local goals

3. 3
Linking Operations to Strategy
Business
Strategy
Product,
Market
Strategies
Long-Term
Capital
Budgets
Multi-Year
Profit
plans
Annual
Operating
Budgets
Variance
Analysis

4. 4
Annual Budget Process
 Begins with a review of strategy, goals for the
coming year
 SWOT analysis
 Respond to SWOT
 Updating multiyear product/profit plans
 Set budget targets
 Communicate goals/assumptions to lower levels

5. 5
Annual Budget Process
 Budget process flows from the top down to
lower levels
 Organizational goals must be determined
 The goals are achieved through activities
 Those activities must be supported with resources

6. 6
Annual Budget Process
 Prepare operating (activity) budgets
 Organizational goal, typically the sales budget, is
communicated to lower levels
 Process of estimating the resources needed to
achieve the sales goal begins
 Materials, labor, overhead, administrative, etc.
 Trickle down process
 Each area must estimate the resources needed to
support the area above

7. 7
Annual Budget Process
Sales Budget
Production Budget
Materials
Budget
Overhead
Budget
Labor
Budget
Cash
Budget
Pro-Forma
Financial
Statements
S&A
Budget
Capital
Budget

8. 8
Annual Budget Process
 At the departmental level
 Goals determine the activities to be conducted
 The activities determine the resources required
 Activity-based costing is very helpful
 Focus should be on resources required, not on the
cost of the resources
 Cost should be determined by accounting, other areas

9. 9
Annual Budget Process
 Consolidate individual budgets into master
budget
 Prepare cash flow budget
 Prepare pro forma financial statements

10. 10
Annual Budget Process
 Review and approve
 Review for consistency with goals
 Revise if necessary
 Approve budget after final revisions
 Communicate to operating units
 Release resources

11. Properties of a Good Budget Process
11
 Should provide a common framework for
discussion of objectives and strategies
 Documents the operational plan to achieve
the goals
 Provides for an appropriate allocation of
resources

12. 12
Properties of a Good Budget
Process
 Proactive, not reactive
 Budget must be tied to strategy
 Budget should be a plan for the attainment of
needed resources, not for limiting amounts that
can be spent
 Critical success factors must receive adequate
funding, regardless of financial condition
 Improves allocation of resources

13. Properties of a Good Budget Process
13
 Should be collaborative, with free flow of
information
 Strategy, goals come from above
 Upper management has better understanding of
strategy
 Resource requirements come from lower levels,
based on assigned objectives
 Operating managers have better understanding of
resource needs

14. Properties of a Good Budget Process
14
 Budget should help develop process
understanding
 What is done, and why?
 Understand the interdependencies among
activities
 Identify resource drivers

15. Properties of a Good Budget Process
15
 Focus on resources needed, not cost
 Operating managers should identify the quantities
of resources needed
 Accounting should translate into monetary amounts
 Managers may not know the cost of the resources
requested

16. Properties of a Good Budget Process
16
 Budget should not be a reward/penalty
system
 Achievement of organization-wide goals must take
precedence over empire-building
 Appropriate funding of activities is more important
than rewarding past success or penalizing past
failures

17. Properties of a Good Budget Process
 Recognizes that planning, control, and
evaluation are different, require different tools
17
 Original budget is a plan for operations
 Actual operations may deviate from plan, either
intentionally or unintentionally
 Usually cannot be used effectively for evaluation of
results
 Control and evaluation require “apples to apples”
comparison
 Flexible budget

18. Properties of a Good Budget Process
18
 Goals should be reasonable, attainable
 Overly ambitious goals are detrimental
 System can only produce to its capabilities
 Negative impact on employees
 “Stretch goals” are fine if attainable, and
resources are provided

19. Properties of a Good Budget Process
19
 Should seek to minimize game playing
 Padding the budget
 Overestimation of resource needs
 Results in misallocation of resources
 Budget slack
 Underestimating achievable goals
 Goals are easily achieved
 May not reach desired level of achievement
 Surpassing goals may strain other areas

20. Properties of a Good Budget Process
20
 The budget should not be an end in itself
 Budget should be used to guide operations
 Avoid institutionalized budgeting
 Mechanical, little thought given to the process
 Lacks relevance to organization’s plan or problems
 Serves no purpose other than to keep employees busy
during budget preparation season
 Okay to adjust prior year budget for expected
changes

21. 21
Budgets for Performance Evaluation
 “Static” budget is of little use
 Conditions may change, requiring deviation from
original plans
 Pointless to compare initial plan to final results
when determining appropriateness of resource
use
 Given what was achieved, what resources should have
been consumed?

22. 22
Budgets for Performance Evaluation
 Flexible budget is better for control,
evaluation
 Sets milestones
 Can be tailored to actual operating results
 Variances have more meaning when determining
whether resource use was efficient or not
 Still want explanations for deviations from plan

23. 23
Budgets for Performance Evaluation
 Variances
 Quantity variances
 Evaluate reasonableness of the amount of resources
consumed given the output achieved
 Price variances
 Evaluate the cost of the resources consumed
 Both are needed for adequate understanding of
results

24. 24
Budgets for Performance Evaluation
 Evaluations must be done carefully
 Budgets are based on estimates, guesses,
assumptions and lies
 Actual results are based on reality