The term budget is normally good understood by the layperson. Many people, for illustration, budget for their ain family disbursals even if it is merely by doing a unsmooth comparing between following month ‘s wage and the following month ‘s outgo.
Main characteristics of a budget
1 Policies. A budget is based on the policies needed to carry through the aims of the entity.
2 Data. It is normally expressed in pecuniary footings.
3 Documentation. It is normally written down.
4 Period. It relates to a future period of clip.
Most entities will normally fix a considerable figure of budgets. A fabrication entity, for illustration, would usually fix gross revenues, production and disposal budgets. These budgets would so be combined into an overall known as a maestro budget. This will include a budgeted net income and loss history, a budgeted balance sheet and a budgeted hard currency flow statement.
Once a maestro budget has been prepared, it will be examined closely to see whther the overall program can be accommodated. It might be the instance, for illustration, that the gross revenues budget indicates a big addition in gross revenues. This will hold required the production budgets to be prepared on the footing of this excess gross revenues demand. The hard currency budget, nevertheless, might demo that the entity could non finance the excess gross revenues and production activity out of its budgeted hard currency resources, so extra funding agreements will hold to be made because evidently no entity would usually turn down the chance of increasing its gross revenues.
Budgets are utile because they encourage directors to analyze what they have done in relation to what they could make. However, the full benefits of a budgeting system merely became evident when it is used for control intents. This involves doing a changeless comparing between the existent consequences and the budgeted consequences, and so taking any necessary disciplinary actions. This process is called budgetary control.
When the existent consequences for a period are compared with the budgeted consequences and it is seen that there are material or important differences ( called discrepancies ) so disciplinary action must be taken to guarantee that future consequences will conform to the budget. This is the kernel of budgetary control. It has several of import characteristics.
Important Features of Budgetary Control
1 Responsibilities. Managerial duties are clearly defined.
2 Action Plan. Individual budgets lay down a elaborate program of action for a peculiar domain of duty.
3 Adherence. Directors have a duty to adhere to their budgets once the budgets have been approved.
4 Monitoring. The existent public presentation is monitored invariably and compared with the budgeted consequences.
5 Correction. Corrective action is taken if the existent consequences differ significantly from the budget.
6 Approval. Departures from the budget are merely permitted if they have been approved by senior direction.
7 Discrepancies. Those that are unaccounted for are capable to single probe.
Any discrepancy that occurs should be investigated carefully. The current existent public presentation will be instantly brought back into line with the budget if it is considered necessary. Sometimes the budget itself will be changed, e.g. if there is an unexpected addition in gross revenues. Such alterations may, of class, have an consequence on the other budgets and so can non be done in isolation.
The Budget Procedure
The budget process starts with an scrutiny of the entity ‘s aims. These may be really simple. They may include, for illustration, an overall want to maximise net incomes, to further better dealingss with clients, or to better the on the job conditions of employees. Once an entity has decided on its overall aims, it is in a place to explicate some elaborate programs.
These will likely get down with a prognosis. These is a proficient difference between a prognosis and a budget. A prognosis is a anticipation of what is likely to go on, whereas a budget is a carefully prepared program of what should go on.
The Budget Period
The chief budget period is normally based on a calendar twelvemonth. It could be shorter of longer depending on the nature of the merchandise rhythm. The manner industry, for illustration, may follow a shorter budget period of less than a twelvemonth, while the building industry may choose for a five twelvemonth period. Irrespective of the industry, nevertheless, a calendar twelvemonth is normally a convenient period to take as the base period because it fits in with fiscal accounting demands.
Besides finding the chief budget period, it is besides necessary to fix budgets for much shorter periods. These are required for budgetary control intents in order to compare the existent consequences with the budgeted consequences on a frequent footing. The sub-budget periods for some activities may necessitate to be really short if really tight control is to be exercised over them, e.g. the hard currency budget demand to be compiled on a hebdomadal footing. In contrast, the disposal budget may necessitate to be prepared merely quarterly.
The Budget Administration
The budget process may be administered by a particular budget commission, or it may be supervised by the accounting map. It will be necessary for the budget commission to put down general guidelines in conformity with the company ‘s aims, and to guarantee that single sections do non run wholly. The production section, for illustration, will necessitate to cognize what the company is budgeting to sell so that it can fix its ain budget on the footing of those gross revenues. However, the elaborate production budget must still stay the full duty of the production director.
This process is in line with the construct of duty accounting. If the control process is to work decently, directors must be given duty for clear defined countries of activity, such as their peculiar cost Centre. They are so to the full answerable for all that goes on there. Unless directors are given wholly authorization to move within clearly defined guidelines, they can non be expected to account for something for which they are non responsible. This means that, every bit far as budgets are concerned directors must assist fix, amend and O.K. their ain cost Centre ‘s budget if the budgetary control system is to work.
The Budgeting Procedure
In commercial organisations, the first budget to be prepared is normally the gross revenues budget. Once the gross revenues for the budget period ( and for each sub-budget period ) have been determined, the following phase is to cipher the consequence on production. This will so enable an in agreement degree of activity to be determined. The degree of activity may be expressed in so many units, or as a per centum of the theoretical productive capacity of the entity. Once it has been established so departmental directors can be instructed to fix their budgets on the footing of the needed degree of activity.
Let presume, for illustration, that 1000 units can be sold for a peculiar budget period. The production section director will necessitate this information in order to fix his budget. This does non needfully intend that he will budget for a production degree of 1000 units because he will besides hold to let for the budgeted degree of gap and shutting stocks.
The budgeted production degree will so be translated into how much stuff and labor will be required to run into that peculiar degree. Similarly, it will be necessary to fix overhead budgets. Much of the general overhead outgo of the company ( such as mill administrative costs, caput office costs and research and development outgo ) will be fixed and it will non be affected by the activity degree. One type of operating expense that may be affected by the activity degree is the gross revenues and distribution overhead budget because an addition in the figure of units sold, for illustration, may affect extra bringing costs.
The Interrelationship of Budgets
Not all entities start budget procedure with gross revenues. A local authorization is a good illustration. It normally prepares a budget on the footing of what it is likely to pass. The entire budgeted outgo is so compared with the entire sum of council revenue enhancement ( after leting for grants and other income ) needed to cover it. If the political cost of an addition in council revenue enhancement appears to be excessively high so the council will necessitate a decrease in the budgeted outgo. Once the budget has been set, and the revenue enhancement has been levied on that footing, sections have to work within the budgets laid down. However, since the budget will hold been prepared on an estimation of the existent outgo for the last two or three months of the old fiscal twelvemonth, history has to be taken of any a excess or deficit expected in the current twelvemonth. If the estimation finally proves inordinate, the local authorization will hold overtaxed. This means that it has got some extra financess available to buffer the current twelvemonth ‘s outgo. Of class, if it has under taxed for any balance brought frontward, sections might hold to get down cutting back on what they thought they could pass.
This procedure is quiet different in the private sector because the budgeted gross revenues efficaciously determined all the other budgets. In a local authorization it is the outgo budgets that find what the council revenue enhancement should be, and is merely the control exercised by the cardinal authorities T and by the local authorization itself that places a ceiling on what is spent.
Dyson, J.R. ( 2007 ) Accounting for Non-Accounting Students, 7th edition, Financial Times, Prentice Hall, London.
The full benefits of budgeting can merely be gained if it is combined with a budgetary control system. The readying of budgets is a valuable exercising in itself because it forces direction to look in front to what might go on, instead than to look back at what did go on. However, it is even more valuable if it is besides used as a signifier of control.
Budgetary control enables existent consequences to be measured often against an in agreement budget ( or program ) . Departures from that budget can so be rapidly spotted, and agreed budget ( or program ) . Departures from that budget can so be rapidly spotted, and stairss taken to rectify any unwelcome tendencies. However, the comparing of existent consequences with a fixed budget may non be peculiar helpful if the existent degree of activity is different from that budgeted. It is advisable, hence, to compare existent consequences with a flexed budget.
As so many functional budgets are based on the budgeted degree of activity, it is critical that it is calculated every bit accurately as possible, since an mistake in gauging the degree of activity could impact all the company ‘s fiscal and operational activities. So it is of import that any difference between the existent and the budgeted degree of activity is investigated carefully.
Budgeting and budgetary control systems may be resented by directors and they might so respond to the systems in such a manner to protect their ain place. This may non be of benefit to the entity as a whole.