“A budgetary planning and control system may include many individual budgets which are integrated into a ‘master budget’.”
Budgeting is concerned with the implementation of long term strategic plans, by translating these long term plans into short term plans of action. A budget is a plan showing a firms short term objectives, and how management intends to acquire, use, and control the resources in order to attain these objectives. A firms budget should be comprehensive and co-ordinated. That is, it must cover the whole organisation, and as long as each individual manager seeks to fulfil his/her part of the budget, the organisation as a whole should be moving in the right direction.
Budgets are a useful planning and control device. “A Budget is a financial plan which is based on expected future activity and is used to control that activity.” There are several reasons for preparing budgets. Some of these are: 1. As stated above, budgets help form comprehensive and co-ordinated plans for the future. 2. To aid planning of operations. A budget gives managers specific short term goals to pursue and achieve, and therefore forces them to think ahead. 3. The budget communicates to lower level management what is expected from them by top management. Therefore communication is facilitated. 4. When managers actively participate in the preparation of the budget, they are motivated to achieve the targets that they have set. Furthermore, this encourages an attitude of responsibility, since each manager will know that he/she is responsible for achieving the set standard. This also leads to a certain freedom of movement, within the limits of the budget, encouraging initiative and facilitating decentralisation. 5. The budget facilitates control by providing a measure for comparing actual results to desired results, and therefore helps identify problems. This also serves as a means of performing management by exception. 6. Similarly, a budget provides the means for comparing performance. Therefore the performance of each manager can be evaluated, and he/she can be rewarded/penalised accordingly. 7. The budget assists the business in determining if price adjustments are likely to be necessary. Therefore, pricing is facilitated. 8. Preparation of budgets helps resolve differences between functional heads by making personal goals subordinate to organisational ones; goal congruency is encouraged.
When preparing a budget, there is a process to be followed. This process consists of the following stages: Budget objectives are stated. Long term plans and goals, set by top management, determine the objectives to be pursued in the annual budget. Setting of attainable financial objectives for the year. This will depend on both external and internal restrictions Sales forecast. The sales budget is prepared, based on the expected demand. Projected cost of goods sold. All the other budgets are prepared, so that the costs can be estimated and apportioned, in order to get the final cost for the goods. If the company follows a ‘bottom - up’ approach, then the budgets are prepared by lower management, and then negotiated so as to fit the overall budget. * The Master budget is completed. The projected Profit & Loss and Balance Sheet are reviewed by top management and approved. It should be noted that while some consider all the budgets and budgeted accounts as part of the master budget (e.g. R.F. Meigs & W. B. Meigs, ‘Accounting: The basis for Business Decisions’, eighth edition, McGraw-Hill Publishing co., 1990, pp. 1002), others consider only the Cash flow statement, Profit & Loss and Balance Sheet as the master budget (e.g. C. Drury, ‘Management and Cost Accounting’, fourth edition, International Thomson Business Press, 1996, pp. 473). Finally, the budget is reviewed periodically so as to identify deviations and take corrective action. If there is a significant change in the environment, then the budget may need to be...
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