(Need Minimum of 5 References), Recommended text book-Accounting,8th edition, chapter 21 – The Master Budget and Responsibility Accounting.
Please use international accounting concept for this SA writing .e.g.UK
The below details are from my lecturer notes,
A budget is a detailed plan outlining the inflow of revenue and the outflow of expenses over a period of time in the future. A budget is a plan usually expressed in quantitative terms either in units or in dollars. There are usually smaller budgets for departments or projects that may or may not be part of a larger consolidated budget.
Advantages of Budgeting:
Budgets provide a means of communicating management’s plans through the organisation.
*Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with daily emergencies.
*The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.
*The budgeting process can uncover many potential bottlenecks before they occur.
*Budgets coordinates the activities of the entire organization. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
*Budgets provide goals and objectives that can serve as benchmark for evaluating subsequent performance.
Disadvantages/Limitations of Budgeting:
Budgets can be seen as pressure devices imposed by management, thus resulting in:
a) bad labor relations
b) inaccurate record-keeping.
Departmental conflict arises due to:
a) disputes over resource allocation
b) departments blaming each other if targets are not attained.
It is difficult to reconcile personal/individual and corporate goals.
Waste may arise as managers adopt the view ,”we had better spend it or we will lose it”. This is often coupled with “empire building” in order to enhance the prestige of a department.
Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs.
Managers may overestimate costs so that they will not be blamed in the future should they overspend.
Types of budget
Sales or Revenue budget:
* is the first schedule prepared because many other schedules are dependent on it.
*shows expected sales and units of production
*is the key to the entire process
*uses expected selling price to extend units sales to revenues
*is often started by individual sales persons or managers predicting sales in their own area for the next period of time.
* an aggregate sales budget is influenced by economic conditions, pricing decisions, competition, marketing programs, etc.
Selling and administrative Expenses budget:
* anticipates selling and administration expenses from the sales and inventory/cost of goods manufactured budgets
*may include the budgets of various individuals or groups involved in selling and administration
* the two budgets may be divided: the selling budget would include marketing costs, salaries , etc. and the administrative budget may include many costs not applicable to manufacturing or selling ( often these are fixed costs).
*cash is a major cincern of a company – management of cash is crucial to meeting debt obligations as they come due without having excess idle
*major goal of all organizations is liquidity-pay all debts when they come due; (student should be reminded of a module 1 concept that income/profit does not necessarily mean cash -the net income and net cash flow of a business may be very different)
*purpose of cash budget: to optimize cash balances ;having enough cash to meet liquidity needs and not having so much cash that profitability is sacrificed ( for example , ecess cash should be earning interest)
*one of the useful management tools
*pulls together other budgets
*sections: receipts , disbursements, cash excess/deficiency, and financing.