Managerial accounting chapter 8

Learning Objective 1

Why do organizations budget and the processes used to create budgets.

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Learning objective number 1 is to understand why organizations budget and the processes they use to create budgets.

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The Basic Framework of Budgeting

A budget is a detailed quantitative plan for acquiring and allocating financial and other resources over a specified forthcoming time period for defined purpose.

The act of preparing a budget is called budgeting.

The use of budgets to control an organization’s activities is known as budgetary control.

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A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. The act of preparing a budget is called budgeting. The use of budgets to control an organization’s activities is known as budgetary control.

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Planning and Control

Planning – involves developing objectives and preparing various budgets to achieve those objectives.

Control – involves the steps [review, iterate] taken by management to increase the likelihood that the objectives set down while planning is attained and that budgets and objectives for each part of the organization is integrated to achieve objective.

Budget often are the controlling exercise to allocate resources to company objectives>

Essential for Resource Allocation

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Planning involves developing objectives and preparing various budgets to achieve those objectives.

Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal.

To be effective, a good budgeting system must provide for both planning and control. Good planning without effective control is time wasted.

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Advantages of Budgeting

Advantages

Define goals

and objectives

Uncover potential

encumbrances

including bottlenecks

Coordinate

activities

Communicate

plans

Think about and

plan for the future

Means of allocating

Resources #1

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Budgets communicate management’s plans throughout the organization. Budgets force managers to think about and plan for the future. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budget process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

While our focus in this chapter is on preparing operating budgets for a one-year time frame, longer term budgets also can be very helpful to organizations from a planning standpoint.

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Responsibility Accounting [part of MBO]

Managers should be held responsible for those items - and only those items - that they can actually control [or influence] to a significant extent. Responsibility accounting enables organizations to react quickly to deviations from their plans and to learn from feedback.

Responsibility- Learn & Correct

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The premise of responsibility accounting is that managers should be held responsible only for those items that they can control to a significant extent. Responsibility accounting systems enable organizations to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

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Choosing the Budget Period

Operating Budget

2xx1

2xx2

2xx3

2xx4

Operating budgets ordinarily

cover a one - fiscal year

corresponding to a company’s fiscal year. Many companies divide their annual budget

into four quarters or twelve months.

A continuous budget is a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.

As a practical matter for a Manager; income may be tied to performance to Annual Budget including objectives

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Operating budgets ordinarily cover a one-year period corresponding to a company’s fiscal year. Many companies divide their annual budget into four quarters. In this chapter, we focus on one-year operating budgets.