Management Control System Assignment “Budgeting Preparation” * Budget Preparation Budget preparation is a summary of company’s plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management’s plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated.
More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets. * Gudeline of Budget Preparation Operating Budgets An operating budget is a statement that presents the financial plan for each responsibility centre during the budget period and reflects operating activities involving revenues and expenses. The most common types of operating budgets are expense, revenue, and profit budgets Expense Budget
An expense budget is an operating budget that documents expected expenses during the budget period. Three different kinds of expenses normally are evaluated in the expense budget -fixed, variable and discretionary (Discretionary expenses – costs that depend on managerial judgment because they cannot be determined with certainty, for example: legal fees, accounting fees and R&D expenses). Revenue Budget A revenue budget identifies the revenues required by the organization. It is a budget that projects future sales. Profit Budget A profit budget combines both expense and revenue budgets into one statement to show gross and net profits.
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Profit budgets are used to make final resource allocation, check on the adequacy of expense budgets relative to anticipated revenues, control activities across units, and assign responsibility to managers for their shares of the organization’s financial performance. Financial Budgets Financial Budgets outline how an organization is going to acquire its cash and how it intends to use the cash. Three important financial budgets are the cash budget, capital expenditure budget and the balance sheet budget. Cash budget Cash budgets are forecasts of how much cash the organization has on hand and how much it will need to meet expenses.
The cash budget helps managers determine whether they will have adequate amounts of cash to handle required disbursements when necessary, when there will be excess cash that needs to be invested, and when cash flows deviate from budgeted amounts. Capital Expenditure Budget Capital Expenditure Budgets, Investment in property, buildings and major equipment are called capital expenditure. Such capital expenditure budgets allow management to forecast capital requirements, to on top of important capital projects, and to ensure the adequate cash is available to meet these expenditures as they come due.
The balance sheet budget The balance sheet budget plans the amount of assets and liabilities for the end of the time period under considerations. A balance sheet budget is also known as a pro forma (projected) balance sheet. Analysis of the balance sheet budget may suggest problems or opportunities that will require managers to alter some of the other budgets * Budgeting Process * Behavioral Aspects Actually, an effective budget preparation process blends the two approaches. Budgetees prepare the first draft of the budget for their area of responsibility, they do so within guideliness established at higher level.
Senior managers review and critique these proposed budgets. Research has shown that budget preparation where the process in which the budgetee is both involved and has influence over the setting of budget amounts and it has positive effects on managerial motivation for two reasons : 1. There is likely to be greater acceptance of budget goals if they are perceived as being under managers’ personal control, rather than being imposed externally. This will leads to higher personal commitment to achieve the goals. 2. Participative budgeting result in effective information exchanges.
The approved budget amounts benefit from the expertise and personal knowledge of the budgetees, where the budgetees have a clearer understanding of their jobs through interactions with superior during the review and approval phase. The budget department has a particularly difficult in behavioral problem. It must analyze the budgets in details, and it must be certain that the budget are prepared properlu and that the information is accurate. To accomplish the tasks, the budget department sometimes must act in ways that line managers perceive as threatening or hostile.
To perform, their function effectively, the members of the budget department must have a reputation for impartiality and fairness. If they do not have this reputation, it becomes difficult, if not impossible, for them to perform the task necessary to maintaining the effective budgetary control system. Citation Anthony, R. N. , ; Govindarajan, V. (2007). Behavioral Aspects. In Management Control System (pp. 391-393). New York: McGraw-Hill. How to Prepare Budget. (n. d. ). Retrieved November 02, 2012, from CWA – Communication Workers of America:
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