There are a number of advantages attached to budgeting and budgetary control: • It compels the management to weigh the future, which is probably the most important
feature of a budgetary planning and control system. It also forces the management to look ahead, to set out detailed plans for achieving the targets for each department,
176 Accounting for Managers operation and (ideally) each manager, to anticipate and give the organisation purpose and direction
• It promotes coordination and communication.
• It clearly defines areas of responsibility in that it requires managers of budget centers to be made responsible for the achievement of budget targets for operations under their personal control.
• Such a control provides a basis for performance appraisal (variance analysis). A budget is a yardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors.
• It facilitates remedial action to be taken as variances emerge.
• It also motivates employees by participating in the setting of budgets. • This control improves the allocation of scarce resources.
• It economises management time by using the management by exception principle. PROBLEMS IN BUDGETING Even though budgets are an indispensable part of any marketing activity, they do have a number of disadvantages, particularly in terms of perception.
• Budgets can be seen as pressure devices imposed by management, thus resulting in: Bad labour relations
Inaccurate record keeping • Departmental conflict arises due to:
Disputes over resource allocation
Departments blaming each other if targets are not attained
• Difficulties in reconciliation of personal/individual and corporate goals
• Wastage arising as managers adopt the view, "we had better spend it or we will lose it", often coupled with "empire building" in order to enhance the prestige of a department • Responsibility versus controlling, i.e. some costs coming under the influence of more
Accounting for Managers 177 • Managers overestimating costs so that they will not be blamed in the future that they
overspend
CHARACTERISTICS OF A BUDGET A good budget is characterized by the following:
• Participation: Involve as many people as possible in drawing up a budget. • Comprehensiveness: Embrace the entire organisation.
• Standards: Base it on established standards of performance. • Flexibility: Allow for changing circumstances.
• Feedback: Constantly monitor performance.
• Analysis of costs and revenues: This can be done based on product lines, departments or cost centers.
BUDGET ORGANISATION AND ADMINISTRATION In organising and administering a budget system, the following characteristics may apply:
• Budget centers: Units responsible for the preparation of budgets- a budget centre may encompass several cost centers.
• Budget committee: This may consist of senior members of the organisation, e.g. departmental heads and executives (with the managing director as chairman). Every part of the organisation should be represented on the committee, so there should be a representative from sales, production, marketing and so on. Functions of the budget committee include:
Coordination of the preparation of budgets, including the issue of a manual Issuing timetables for preparation of budgets
Provision of information to assist budget preparations
Comparison of actual results with budget and investigation of variances • Budget Officer: Controls the budget administration. This involves:
Liaising between the budget committee and managers responsible for budget preparation
Dealing with budgetary control problems Ensuring that deadlines are met
178 Accounting for Managers Educating people about budgetary control
• Budget manual: This document: Charts the organisation Details the budget procedures
Contains account codes for items of expenditure and revenue Timetables the process
Clearly defines the responsibility of personnel involved in the budgeting system
Study Notes
Assessment
1. What are the advantages of Budgetary control? 2. State the limitations of Budgetary control. 3. What are the characteristics of Budget.
Discussion
Accounting for Managers 179
4.8 Steps in Preparing Budget
Following are the steps to remember at the time of preparing budget:
1. Selecting a budget period: The length of the budget period depends on the kind of plan being made. Some budget periods will follow the natural cycle time, for example, one year for a sales budget. Management may determine other budget periods, for example, five years for capital expenditure budget.
2. Setting or ascertaining the objectives: The objectives of the business have to be set so that the plans may be prepared to achieve those objectives.
3. Preparing basic assumptions and forecasts: A statement of the basic assumptions on which the individual budgets are to be based must be prepared. A forecast is then made of the general economic climate and conditions in the industry and for the company. Forecasts are made for the following areas: sales, productions, selling and distribution expense, administrative expense, production expense, research and development expense, cash, purchases, capital expenditure, working capital and master forecast, namely the Income Statement and Balance Sheet Forecasts.
4. Understanding the need to consider any limiting factor: A limiting factor prevents a company from expanding to infinity. Limiting factors affect budgeting and they must be considered to ensure that the budgets can be attained. Examples are raw material shortage, labor shortage, insufficient production capacity, low demand for products, lack of capital etc.
5. Finalizing forecasts: Forecasts are finalized and now become budgets, which are formally accepted.
6. Implementing the budget: Accepted budgets must be implemented. This step onwards, the budget becomes the standard by which performance is measured.
7. Reviewing forecasts and plans: Forecasts and budgets have to be reviewed at regular intervals. Changing environment may require changes to be made. Revised budgets may have to be prepared.
180 Accounting for Managers
Assessment
1. Describe the process of budget preparation. 2. What are the steps in preparing a budget.
Discussion
1. Keeping the above points in mind, prepare budget for a training programme for employees on Team building. The programme is a one day event.