Budgeting (1.1)

• Budget is a detailed qualitative plan accquiring and using financial and other resources over a specified time period.
• Budgeting is the act of preparing a budget.
• Budgetary control is the use of budget to control a firm's activities.
• Formalize the Planning Process is to compel managers to think about the future. This forces them to set goals, consider future problem areas and formulate strategies.
• Create a Plan of Action the planning process brings together ideas, forecasts, resource availability and financial realities to create a course of action to achieve the firm's goals and objectives. Build the plan and then use it!
• Coordinate and Integrate Management's Effort the budgeting process opens the lines of communication within the firm. It entails coordinating the activities of the various parts of the firm and ensuring that the parts are in harmony with each other. Goal congruence refers

  to a firm’s striving to achieve a common set of objectives.
• Aid in Resource Allocation budgeting enables the firm to allocate its resources to where they can be used the most effectively.
• Motivate Managers are driven to achieve their budget targets because they participated in its making and thus take pride in achieving it, they can see cleary how their roles fit together and there perfomrance which include meeting their budget targets.
• Create a Basis Performance Evaluation is the actual results lacks meaning useless they are compared to some target or budgeted performance. A budget serves a benchmark or standard against which actual results are measured and managers' perfomance are evaluated.
• Promote Continious Improvement budgeting required and inetgrates into operational plans many improvement processes such as redesigning processes, increasing productivity, eliminating non value adding activities and minimizing quality problems.
• Create an Aura of Control a busget system serves as fiscal disciplinarian and helps ensure that managers understand their authority, responsibility and limitations.
• Planning involves developing objectives and preparing various budgets to achieve those objectives.
• Control refers to the steps taken by management to increase the likehood of attaining the objectives set in the planning stage and that all parts of the organization are working together toward the goal.
• Strategic planning process. Long range planning defines firm's mission (why the firm exists), the long range goals (what level of achevement it expects) and strategic plan(what markets, price policies, resource needs and production capabilities the firm will have).
• Business plan and personal goal setting. Creating the annual business plan is the task of evaluating the firms's stregths and weaknesses.
• Planning process and timetable. A budgeting schedule includes when to start the process, submit budgets, review and approve budgets.
• Responsibility accounting system. A planning and control system that combines responsibility centers, control reports and activity centers and cost drivers from activity based costing.
• Reward (incentive) system. Reward are given to managers whoa chieve their unit's budget goal and MBO targets.
• Finacial modeling. Ability to evaluate alternative or what if scenarios are an expected part of any financial planning system.
• Participatory budgeting. It is assumed that every manager is involved in planning and control sometimess called "grass roots" budgeting.
• Planning vs Motivation - demanding budgets that may not be achieved may be appropriate to motivate maximum performance, but they are unsuitable for planning purposes.
• Planning vs Performance Evalution - in planning, budgets are set in advance of the budget period based on an anticipated set of circumtance or environment.
• As to the Level of Performance Standard

  1. Stretch level budget

  2. Highly achievable budget
• As to the Flexibility of Budget

  1. Flexible Budget

  2. Fixed (Static) budget

  3. Activity-Based budget

  4. Kaizen Budget
• As to Budget Period

  1.Periodic (Annual) budget

  2. Continuous (Perpetual/Rolling/Progressive) budget

  3. Capital budget

  4. Life Cycle budget
• As to Base Amount

  1.Zero-based budget

  2. Incremental (Traditional) budget
• As a Major Component of the Master

  Budget

  1.Operating budget

  2. Financial budget

  3. Capital budget
• A budget period is the length of time for which a budget is effective.
• Stretch level budget – based on idealistic conditions and has a small chance of being met.
• Highly achievable budget – challenging but which can be met thru hard work
• Flexible budget – projection of revenuesand costs at different levels of activity. It separates costs into fixed and variable components and uses standard costing to prepare budgets at multiple activity levels
• Fixed (Static) budget – projection of revenues and costs at a particular or single level of activity. It does not segregate costs into fixed and variable components.
• Activity-Based budget – applies ABC principles and procedures to budgeting. It requires three steps, namely: identification of activities, estimation of activity output demands, and estimating the costs of resources needed to provide the activity output demanded.
• Kaizen Budget – assumes “continues improvement” of products and processes, the effects of improvement and the costs of their implementation.
• Periodic (Annual) budget –covers 1 year only, usually divided into quarters or months.
• Continuous (Perpetual/Rolling/Progressive) budget – a 12-month budget that rolls forward one month or quarter as the current month or quarter is completed.
• Capital budget – a long term budget showing the planned financing, acquisition and disposal of fixed assets.
• Life Cycle budget – a product’s revenues and expenses are estimated over its entire life cycle (from research and development to withdrawal of customer support). It is useful in target costing & target pricing.
• Zero-based budget – a budget wherein managers are required to justify all expenditures (costs) as if the programs involved are being proposed for the first time.
• Incremental (Traditional) budget – a budget prepared based on the previous period’s budget, adjusted based on changes expected to happen in the coming period. Managers are required to justify only the changes (increments) made on the previous budget.