Behavioural Issues Relating to Budgeting

Problems with budgeting usually fall into following groups: Figures in budget are not actual figures, they are plans based on historical data, forecasts or human judgement. Accuracy of data could be responsibility of another business function. Preparation is managerial process requiring great deal of co-ordination. Information comes from different parts of organisation. Preparation can be time consuming and resource intensive. […]

The Need for Prompt and Relevant Corrective Action

Variance analysis attempts to identify discrepancy between actual and planned results. Adverse/unfavourable variance should be investigated – determine cause i.e. inefficiency or external factor, Inefficiency could be caused by lack of motivation or inappropriate training.  Steps should be taken to rectify issues. External factors, such as a downturn in market, are harder to accommodate. May be necessary to amend targets […]

Accounting Variance

Variance – difference between budgeted figure and actual figure. Usually at end of budget period. Can be favourable (F) or adverse (A). Favourable variances – actual figure is better than budgeted figure. Adverse variances – actual figures are worse than budgeted figures. Managers examine variances to determine how improvements can be made.

Budgeted and Actual Figures

Budgets set out in financial terms the responsibilities of executives in relation to requirements of organisations policy. Comparing actual results against budgeted results allows managers to meet the objectives of the policy or to determine necessary revisions of the policy. Budgetary controls assist managers with planning, coordinating and controlling of individuals activities and overall performance of organisation.

Monitoring Process

Budgetary control – business looks to future & states what it wants to happen and to achieve, then decides how to get there. How does a department know that it’s performance is satisfactory. Targets set to allow business to know if objectives have been met. Results achieved compared to targets set. Control is effective if information is readily available to […]

Budget Types

Budget Types Fixed budget Can be divided into different categories. Different planning approach to flexible budget. Based on fixed period of time & finding best way to achieve particular objective. e.g. Sales budget shows how sales targets will be met. Flexible budget Can change as business changes. Changing business conditions can result in different outcomes than those initially budgeted for – […]

Preparing a Budget

Starting point – identify key factor restricting organisations growth such as sales, human resources, physical space. All other activities determined by constraining factor.

The Benefits of Budgets

Various potential benefits of budgets & budgeting such as: coordinating business and service operations plan ahead – often reveals need for action which may have been otherwise forgotten learn – effective budgeting systems contain feedback loops motivating managers budgetary targets focus attention Performance judged against targets – must be achievable, realistic, negotiated rather than imposed. If not, they can demotivate. […]

Process

Budgeting framework and standard costing framework are similar: plans set performance targets established outcome measures compared against targets corrective action taken if required Organisation should have corporate strategy, based on that: set of business/service strategies operational strategies business/service action plans Organisations within parts of public service which are not businesses or quasi-businesses. These set organisations’s long-term objectives and goals. Budgets […]

Target Setting

Important financial technique – setting goals & objectives. Managers use financial targets to monitor & assess success of financial control mechanisms. Typical targets deal with sales volumes & expenditure levels, achieved via budgeting techniques. Key principles around budgeting targets revolve around historical comparisons e.g. year-on-year. Able to determine operational trends and determine how to act upon them. Necessary to establish […]