Lecture 9 - Functional budgets preparation Flashcards
What do budgets indicate?
Budgets are a clear indication of what is
expected to be achieved during the budget
period, whereas long-term plans represent
the broad directions that top management
intend to follow.
Functions of budgets:
- Motivation
- Planning
- Control
- Performance evaluation
- Coordinating
- Communication
Who are the budgeting committee and what is their task?
- High level executives who represent the major segments within a business
- Their task is to ensure budgets are realistically established and coordinated
The budgeting process consists of these steps:
- Identify the budget period
- Budgets may be continuous (rolling forward)
- Communicating expectations to managers
- Determine the limiting factors
- Initial preparation of various budgets
- Negotiation of budgets
- Cooridnation and review of budgets
- Final acceptance
- Budget review
What is a limiting factor?
Any factor which restricts demand, the volume of
production, or any other resource and so limits the
activity of the organisation is described as a limiting
factor.
-It is essential to identify the limiting factors early
because these may determine the starting point for
budget preparation
For each limiting factor, management must consider:
– it is possible to overcome the limitation or
– the limitation has to be accepted because its
outside the control of the organisation
After budget preparation, the budgets must be….
Reviewed and agreed upon by top management
-Budgets are never carved in stone and must
be constantly reviewed for potential changes
Benefits of budgeting:
- Communication of plans
- Forces managers to think ahead
- Highlights potential problem areas
- Whole organisation
- Benchmark for evaluating performance
Limitations of budgeting:
- Not very good for fast paced environments
- Time consuming
- Changes are not implemented quick enough
- Too much focus on short term
- Meets lower targets and doesn’t improve them
- Ignores shareholder value drivers
