Budget Management Analysis

Topics: Budget, Direct material price variance, Budgets Pages: 5 (1498 words) Published: November 16, 2010
Budget Management Analysis

Budget Management Analysis
A budget is a tool that helps managers to ensure that the required resources are obtained and used effectively and efficiently as the organization moves towards achievement of its objectives. A budget is stated in terms of money and is usually made for one year depending either on the prior year’s budget or on existing programs (Cleverly & Cameron, 2007, p. 330). Creating a working budget is a very difficult undertaking, and for the budget to be functional, an organization must stick to the budget very closely. No matter how closely a budget is followed, there will be variances. Organizations can expect such variances and be able to work such situations into budgetary constraints. This paper assesses certain situations in which budgeting, forecasting, and variance interact. Managing the Budget within the Forecast

According to Cleverly & Cameron, (2007, p. 331), when management is done by many different people, budgeting becomes imperative. As a result, the organization needs to have a person in charge of finances who knows how to manage the money. Several strategies have been found to be very efficient in ensuring that this is achieved. The first strategy is to forecast important budgets when a one-year budget is created. The capacity to anticipate as operations grow or worsen allows time to react rather than acting under pressure. This tactic also drives an individual toward the establishment of effective monetary policy (Deschamps, 2004, p. 648). Good management needs policies that limit debt, govern balances, and minimum reserves. The second strategy is budget should be able to recover many expenses. As much as a business usually has some very mandatory needs, whenever something is not so pertinent to the function of the business, this cost should be saved. In health care, the extra expense can be recovered by placing cost on the essential services in the facility. The third strategy is the budgeting should reflect spending priority. The vital services and products that the organization or the business needs are often important to identify. These services and products should be given greater spending priority because they are a necessity (Deschamps, 2004, p. 649). The final strategy is the measure of the performance of the business output. This should be able to reflect the goals of the organization. It is important to benchmark the expenses on the services. Besides the expenses and other fees, there should be other options that can bring in more revenue (Deschamps, 2004, p. 649). The diversity of the organization to income and sales tax can greatly improve the revenue of the organization. Variance in Budgeting

Budgeting variances are associated with about seven expense categories. Good management practice allows these variances for the purposes of budgetary control (Baker & Baker, 2006, p. 129). Material price variance describes the difference between the amount spend on a certain item and the estimated cost when creating the budget. The material prices are calculated by subtracting the expected cost from the cost and multiplying by the volume of items (Baker & Baker, 2006, p. 129). Isolating the difference during the buying process, the variance is usually calculated using the quality of the item rather than the quantity used. Material quality variances bring out the differences between the exact amount of material used in the process of production and the expected material that was indicated on the budget. When the variance shows that quantity is higher, this is not favorable (Baker & Baker, 2006, p. 131). The labor rate variance is a rate used to determine the pay that workers receive on an hourly basis. Labor efficiency is the time and amount of work that was used on a standard rate (Baker & Baker, 2006, p. 131). Spending variance is used to refer to the cost of work. This is obtained by finding the difference between the amount...
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