THE INSTITUTE OF FINANCE MANAGEMENT
Course Name: MSC. FINANCE AND INVESTMENT (MFI)
Module Name: Accounting for Decision Making and Control
Module Code: AF 09101
INTRUDUCTION OF THE BUDGETTING
Budget is a combinations of company activities within which a company coordinate to a common plan for future period. The budget is not something that originates 'from nothing' each 'year - it is developed within the context of ongoing business and is ruled by previous decisions that have been taken within the long-term planning process. When activities are initially approved for inclusion in the long-term plan, they are based on ...view middle of the document...
1. Determining the factor that restricts the output.
2. Preparation of sales budget.
3. Initial preparation of various budget.
4. Negotiations of budget with supervisors.
5. Coordination and review of budget.
6. Final acceptance of budgets
7. Outgoing review of budget.
The multiple functions of budgets
Budgets serve a number of useful purposes. They include:
1. Planning: The major planning decisions will already have been made as part of the long-term planning process. However, the annual budgeting process leads to the refinement of those plans, since managers must produce detailed plans for the implementation of the long-range plan. Without the annual budgeting process, the pressures of day-to-day operating problems may tempt managers not to plan for future operations.
2. Coordinating: The budget serves as a vehicle through which the actions of the different parts of an organization can be brought together and reconciled into a common plan. Without any guidance, managers may each make their own decisions, believing that they are working in the best interests of the organization.
3. Communication: If an organization is to function effectively, there must be definite lines of communication so that all the parts will be kept fully informed of the plans and the policies, and constraints, to which the organization is expected to conform. Everyone in the organization should have a clear understanding of the part they are expected to play in achieving the annual budget. This process will ensure that the appropriate individuals are made accountable for implementing the budget.
4. Motivation: The budget can be a useful device for influencing managerial behaviour and motivating managers to perform in line with the organizational objectives. A budget provides a standard that under the right circumstances, a manager will be motivated to strive to achieve. However, budgets can also encourage inefficiency and conflict between managers.
5. Control: A budget assists managers in managing and controlling the activities for which they are responsible. By comparing the actual results with the budgeted amounts for different categories of expenses, managers can identify costs which do not conform to the original plan and thus require their attention.
6. Performance evaluation: A manager's performance is often evaluated by measuring his or her success in meeting the budgets. In some companies bonuses are awarded on the basis of an employee's ability to achieve the targets specified in the periodic budgets, or promotion may be partly dependent upon a manager's budget record.
The following are the different methods of budgeting, which provide critical analysis for each method. These are:-
i. Zero Based Budgeting
This approach of budgeting is particularly used in public sector organization, where by funds...