COST AND MANAGEMENT ACCOUNTING
LECTURE 7: BUDGETING
1.0 What is a budget?
A budget is a quantified short term financial plan of action for a forthcoming
accounting period. It is a plan expressed in monetary terms. A budget is a plan of what
the organization is aiming to achieve and what it has set as target.
The budget is a quantitative statement for a defined period of time, which may include
planned revenues, expenses, assets, liabilities and cash flows. A budget facilitates
planning.
2.0 Budgets and people
Budgets are prepared in order to guide the organization towards its objectives. Budgets
will set guidelines on how manage a business in order to attain its goals. Budgets are
drawn up for control purposes, that is, they represent an attempt to control the
direction in which the organization is moving. However, some budgets can be more
harmful than if none were prepared. The main cause of such mismatch between a
budget and the organization is a failure to consider the human side of budgeting. Many
people look upon budget, not as a guide, but something that has been imposed. For
example:
- A sales manager refuses a salesman go to an overseas market in response to an urgent
and unexpected request from that overseas company. The reason: the overseas sales
expenses budget has already been spent. The result: the most profitable order that the
company would have received for many years is lost to a competitor.
- The factory manager turns down request for overtime work on a job because the
budgeted overtime has already been exceeded. The result: the job is not completed on
time and the company has to pay a large sum under penalty clause in the contract.
1
, Studies have shown that the more that managers are brought into the budgeting
process, then the more successful budgetary control is likely to be. A manager on
whom a budget is imposed is likely to pay less attention to the budget and use it less
wisely in the control process compared to a manager who had an active part in the
drafting of his budget.
3.0 Budgets, planning and control
Having sounded the warning that need to be borne in mind constantly when budgeting,
we can now look at the positive end of budgeting – the advantages of a good budgetary
control system.
When budgets are being prepared, two principal objectives must be uppermost in the
mind of top management:
1. Planning. This means that a properly co-ordinated and comprehensive plan for the
whole business. Each part must interlock with the other parts.
2. Control. Just because a plan is set down on paper does not guarantee that the plan
will be followed automatically and that there will be no deviations from it. Control
is needed to ensure a plan is followed and control is exercised via the budgets, thus
the term “budgetary control”. To achieve real control, the responsibility of
managers and budgets must be so linked that the manager responsible for a certain
part of the plan is given a guide to help her produce the desired results and also,
that results achieved are then compared against the expected results, i.e actual
compared with budget.
4.0 Objectives of a budgetary planning and control system.
To ensure the achievement of the organizations`s objectives
To compel planning
To communicate ideas and plans
To coordinate activities
2
LECTURE 7: BUDGETING
1.0 What is a budget?
A budget is a quantified short term financial plan of action for a forthcoming
accounting period. It is a plan expressed in monetary terms. A budget is a plan of what
the organization is aiming to achieve and what it has set as target.
The budget is a quantitative statement for a defined period of time, which may include
planned revenues, expenses, assets, liabilities and cash flows. A budget facilitates
planning.
2.0 Budgets and people
Budgets are prepared in order to guide the organization towards its objectives. Budgets
will set guidelines on how manage a business in order to attain its goals. Budgets are
drawn up for control purposes, that is, they represent an attempt to control the
direction in which the organization is moving. However, some budgets can be more
harmful than if none were prepared. The main cause of such mismatch between a
budget and the organization is a failure to consider the human side of budgeting. Many
people look upon budget, not as a guide, but something that has been imposed. For
example:
- A sales manager refuses a salesman go to an overseas market in response to an urgent
and unexpected request from that overseas company. The reason: the overseas sales
expenses budget has already been spent. The result: the most profitable order that the
company would have received for many years is lost to a competitor.
- The factory manager turns down request for overtime work on a job because the
budgeted overtime has already been exceeded. The result: the job is not completed on
time and the company has to pay a large sum under penalty clause in the contract.
1
, Studies have shown that the more that managers are brought into the budgeting
process, then the more successful budgetary control is likely to be. A manager on
whom a budget is imposed is likely to pay less attention to the budget and use it less
wisely in the control process compared to a manager who had an active part in the
drafting of his budget.
3.0 Budgets, planning and control
Having sounded the warning that need to be borne in mind constantly when budgeting,
we can now look at the positive end of budgeting – the advantages of a good budgetary
control system.
When budgets are being prepared, two principal objectives must be uppermost in the
mind of top management:
1. Planning. This means that a properly co-ordinated and comprehensive plan for the
whole business. Each part must interlock with the other parts.
2. Control. Just because a plan is set down on paper does not guarantee that the plan
will be followed automatically and that there will be no deviations from it. Control
is needed to ensure a plan is followed and control is exercised via the budgets, thus
the term “budgetary control”. To achieve real control, the responsibility of
managers and budgets must be so linked that the manager responsible for a certain
part of the plan is given a guide to help her produce the desired results and also,
that results achieved are then compared against the expected results, i.e actual
compared with budget.
4.0 Objectives of a budgetary planning and control system.
To ensure the achievement of the organizations`s objectives
To compel planning
To communicate ideas and plans
To coordinate activities
2
