Topics: Budget, Zero-based budgeting, Budgets Pages: 11 (1752 words) Published: August 11, 2014

BAAB 2073


Lecturer : MR. ISZMI ISHAK

The basic framework of budgeting


Basic definations
i. A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of preparing a budget is called budgeting.
2. The use of budgets to control an organization’s activities is known as budgetary control.

Difference between planning and control
i. Planning involves developing objectives and preparing various budgets to achieve those objectives. ii. Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal. iii. To be effective, a good budgeting system must provide for both planning and control. Good planning without effective control is time wasted.

Advantages of budgeting
i. Budgets communicate management’s plans throughout the organization. ii. Budgets force managers to think about and plan for the future. iii. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. iv. The budgeting process can uncover potential bottlenecks before they occur. v. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. vi. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

The bottom-up/self-imposed budget
1. A self-imposed budget or participative budget is a budget that is prepared with the full cooperation and participation of managers at all levels. It is a particularly useful approach if the budget will be used to evaluate managerial performance. 2. The advantages of self-imposed budgets include:

a. Individuals at all levels of the organization are viewed as members of the team whose judgments are valued by top management. b. Budget estimates prepared by front-line managers (who have intimate knowledge of day-to-day operations) are often more accurate than estimates prepared by top managers. c. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. d. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse. 3. Self-imposed budgets should be reviewed by higher levels of management. Without such a review, self-imposed budgets may have too much “budgetary slack,” or may not be aligned with overall strategic objectives. 4. Most companies do not rely exclusively upon self-imposed budgets in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall target profits or sales. Lower level managers are directed to prepare budgets that meet those targets.

The top-down/mandated budgeted
Top-down budget can be known as mandated budget. This budget prepared by the top management and imposed on the lower layers of the organization. The top down budgets clearly express the performance goals and expectations of top management but can be unrealistic because input from the lower-level staff is not obtained. Using a top-down method often saves time overall. Nowdays most of the companies are using top-down only because the top management can save their time on taking decision upon their targets.

Budgetary Slack
a. The difference between the minimum necessary costs and the costs built into the budget or actually incurred. b. Managers might deliberately overestimate costs and underestimate sales, so that they will not blamed in the future for overspending and poor results. c. In controlling actual operations, managers must then ensure that their spending rises to meet their budget, otherwise they will be...
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