IS a comprehensive plan setting forth the expected route tor achieving the financial are operational goals of an organization, Budgeting is an essential step in effect: an planning. Even the smallest business will benefit from preparing a formal written plan for its future operations, including the expected levels of sales. expenses, net income, cash receipts, and cash OUT.
The use of a budget a key element of financial planning and it assists manager in controlling costs. Manager. compare actual costs with the budgeted amounts and take corrective action a: necessary.
Thus controlling costs means keeping actual costs in line wit., the financial plan. Virtually all economical entities businessmen governmental agencies, universities. churches. and individuals avenge in some form of budgeting. For example. a college student with limited financial resources may prepare a list of expected monthly cash payments to see that they do not exceed expected monthly cash receipts. This list is a simple form of a cash budget.
Whale all businesses engage in some degree of planning. the extent to which .plans are formalized in written budgets varies from one business to another.
Large well-managed companies generally have carefully developed budgets for every aspect of their operations. adequate or sloppy budgeting is a characteristic or companies with weak or inexperienced management. Be/1~ms Derived Butting A budget is a forecast or’ future events. In fact. the process of budgeting often call .
Careful planning and preparation of a formal budget benefit ” company in mung ways, including the following: I. Enhance cd reprehensibility. On. a day-to-day basis. most managers locus their attention Oil the routine problems of running the business. In purifying a budget. however, managers art! forced 10 consider all aspects of a company’s internal activities and to make estimates of future economic conditions. including costs. interest rates, demand for the company’s products. and the level bunting increases management’s awareness of the environment. A.H decision-making responsibilities.
Because the outshouts the is of future operation management is forewarn of and spoor 01′ for example. the outgo show» title the com will run salon ell cash the summer months. the responsibly 01/11 expenditure-; or obtain additional Discuss the benefits that a company may derive from a formal budgeting process. 3. Coordination of r , Ionics. Preparation of a budget provides management with an opportunity.
Coors sate the activities of the various departments within the business. for example, the production department should be budgeted to produce approximately the same quantity of goods as the sales department is budgeted to sell.
A written budget shows department managers in quantitative terms exactly what is expected of their departments during the upcoming period. 4.
Performance evaluation, Budgets show the expected costs and expenses for each department as well as the expected output, such as revenue to be earned or units to be produced. Thus the budgets provide a yardstick with which each department’s actual performance may be measured.
Establishing Budgeted Amounts
Comparisons of actual performance with budgeted amounts are widely used in evaluating the performance of departments and of department managers. Two basic philosophic » prevail today that dictate the levels at which budgeted amounts childish be set. We
will identify these philosophies as (I) the behavioral approach and (2) the total quality management approach. We will first discuss the behavioral approach, which currently is the more widely used budgeting philosophy.
The ‘Behavioral Approach
The assumption underlying the behavioral approach is that
managers will be most highly motivated if they view the budget as a/air basis for evaluating a responsibility center’s performance. Therefore, budgeted amounts are set at reasonable and achievable levels: that is. at levels that call be achieved through reasonably efficient operations. A department that operates in a highly efficient manner should be able to exceed the budgeted level -of performance. Failure to study within the budget, in contrast, is viewed as an unacceptable level of performance
The Total Quality Management Approach
A basic premise of total quality management is thus every individual and segment of the organization constantly should strive for improvement. The entire organization is committed to the goal of completely eliminating inefficiency and non-value-added activities. In short, the organization strives to achieve perfection across its entire value chain.
As a step toward achieving this goal, budgeted amounts may be set at levels representing absolute efficiency Departments generally will fall somewhat short of achieving this level of performance. However, even small failures to achieve the budgeted performance serve to direct management’s attentive toward lithospheres in which there is room for improvement.
Selecting and Using a Budgeting Approach The approach used in setting budget amounts reflects the philosophy and goals of top management. Under either approach, however, managers should participate actively in the budgeting process.
Department managers generally are the best source of information as to the levels of performance that can be achieved within their departments. These managers also should understand both the intended purpose of the budget and the philosophy underlying the development of budgeted amounts. In comparing actual performance with budgeted amounts, top management should consider the philosophy use din developing the budgeted amounts. If a behavior»! approach is employed, a highly efficient unit may exceed the budgeted level of performance.
If a total quality management approach is used, a highly efficient unit should fall slight!y short of the budget standards. In the remainder of this chapter and in our assignment material, we will assume that budgeted amounts are set at reasonable and achievable levels (that is, the behavioral approaching this approach will enable us to illustrate and discuss actual levels of per Announce both above and below budgeted levels.