Final Project: Budgeting Essay
Budgeting is used to help companies stay on track without going over their revenue and not spending too much on expenses. Budgeting is a very important part of a business success. There are many types of budgets that range from households to businesses. There have been new developments in the budgeting area in the last few years.
There are some issues when looking at different types of budgets in the workplace some could be considered unethical and some can give an unfair advantage to the departments, it just depends on who is contributing information to the budgets. There are some sources that believe that budgeting should be taken beyond what the traditional budget offers this is known as beyond budgeting. Types of Budgets
There are many advantages to budgeting which include “budgets communicate management’s plan throughout the organization, budgets force manager to think about and plan for the future, the budgeting process provides a mean of allocating resources to those parts of the organization where they can be used most effectively, the budgeting process can uncover potential bottlenecks before they occur, budgets coordinate the activities of the entire organization by integrating the plans of its various parts, budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance” (Brewer, Garrison, & Noreen, 2011, p. 88). There are many types of budget that are used from households to businesses.
According to Brewer, Garrison, and Noreen (2011), a budget is, “a detailed plan for the future, usually expressed in formal quantitative terms” (p. 32). The budgets are used in different time periods, some companies use a continuous budget or perpetual budget which is a twelve month budget that rolls forward one month and there is a participative budget or a self-imposed budget which the budgets are prepared by the department managers and then gone over by upper management (Brewer, Garrison, & Noreen, 2011).
Depending on the type of business depends on the different types of budget that will be used to prepare a master budget. There are three different types of budgets that will be talked about, the master budget, the flex budget, and the planning budget, the different types of budgets are used for different reasons. According to Brewer, Garrison, and Noreen (2011) a master budget is, “a number of separate but interdependent budgets that formally lay out the company’s sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet” (p. 93).
There are several budgets that go into producing the master budget. In most businesses the master budget consist of the following budgets “sales budget, including a schedule of expected cash collection, a production budget (a merchandise purchases budget would be used in a merchandising company), a direct labor budget, a manufacturing overhead budget, and ending finished goods inventory budget, a selling and administrative expense budget, a cash budget, a budgeted income statement [, and] a budgeted balance sheet” (Brewer, Garrison, & Noreen, 2011, p. 95). The master budget is what would be shown to potential investors many of the other budgets are for internal use only and would not be good to show to potential investors because they may not be accurate and could also be misleading to the investors. Before talking about the flex budget the planning budget must be discussed. A planning budget or static planning budget is, “a budget created at the beginning of the budgeting period that is valid only for the planned level of activity” (Brewer, Garrison, & Noreen, 2011, p. 335).
The planning budget is basically just an estimate of what will happen during the period or quarter. Once the company has the planned budget then the flex budget can be used during the course of the period or quarter to help determine the outcome. According to Brewer, Garrison, and Noreen (2011) a flexible budget is “a report showing estimates of what revenues and cost should have been, given the actual level of activity for the period” (p. 335). A flex budget is used to show variances from what was budgeted and what actually occurred during the period.
The flex budget is only for internal use, this is used in each department to see how the department did during the period or quarter. The use of budgets in the workplace Budgets are used for various aspects to help a company forecast the earnings or net income for the upcoming year, and what departments are doing well or not doing well. The master budget is what is used to help forecast the company’s net income for the upcoming year and a flex budget is used during the year to help the departments and upper management to determine how each department is doing throughout the year.
When looking at the planning budget, this budget helps departments plan what the activity of the department will be during the quarter or period. Budgets are used in all workplaces weather they are pronounces or not. Some people use budgets to help in their personal lives as well. Looking at the personal budgets this would include taking what the person makes and subtracting the normal expenses they may have. Some examples of personal expenses would be electric bill, car payment, gas for the car, insurance for home and car, rent or mortgage, and phone bill those are just some of the monthly expenses that people may have.
Some of these expenses would be considered variable expenses meaning that the expenses vary from month to month (Brewer, Garrison, & Noreen, 2011). Let’s say that a person has a monthly income of $2,000 per month their monthly expenses add up to $1,500 per month the person will have $500 to spend on various items or they could also put the money into savings to help when the variable expenses exceed the person income each month.
Businesses have the same concept when looking at a department but if the extra left over at the end of the quarter or period is not looked at extra money that can be saved for other variable expenses or savings for a rainy day it is looked at as income for the company. There are several different types of budgets that company has to deal with during the quarter, period, and year. In order for the budgets to be effective the managers need to be able to understand what each budget in their department consist of and what is need to be done to fulfill the demands of the company.
New budgeting concepts There have been some new advances in the budget. Some companies use something called beyond budgeting to help them forecast the net income for the year. According to Andre (2005) “the essence of the beyond-budgeting model is that organizations must change their focus from top-down control to bottom-up empowerment, because this seems to be the best way to adjust the fast changing world of the information age” (p. 3). Andre goes on to say that many companies overseas are implementing this type of budgeting (2005).
When looking over what beyond-budgeting is it almost seemed as if this concept is the same as flex budgeting? Looking further into flex budgeting and beyond budgeting there are many similarities and just as much ethical issues when dealing with both. One major ethical issue that they both have is when showing the forecasted information to potential investors the budgets could change throughout the year or quarter. This is concept might give false information and misleading the investors.
A flex budget would be better used for internal use only to help each department stay on top of their individual budgets for their departments. Beyond-budgeting has twelve principles, “self-governance framework, empowered managers, accountability for dynamic outcomes, network organization, market coordination, supportive leadership, relative targets, continuous strategy-setting, anticipatory systems, resources on demand, fast distributed information, and relative team rewards” (Andre, 2005, p. 1-3). There are also three questions that are asked when a company needs to determine whether or not use this concept.
The three questions are “does the organization currently have problems with the budgeting process and if so is it prepared to adapt and change this process, to what extent does the organization currently work according to the beyond-budgeting principles, what are the preconditions for successfully implementing beyond budgeting in the organization” (Andre, 2005, p. 3). Beyond-budgeting is not the only concept that has been discussed there are also talks of zero-base budgeting. Udo (2012) states, “zero-base budgeting is analogous to the marketing concept.
Both require series of information, zero-base budgeting requires information on activities and task to be covered in the budget while marketing concepts collects information on the customers’’ wants and needs” (p. 3). This concept is being used in Nigerian companies at this time. There have been many different concepts that are being discussed in many different articles, but it seems budgeting no matter what type of that is being used budgeting is very important to the success of a company. Conclusion Budgeting is used to help companies stay on track without going over their evenue and not spending too much on expenses. After looking over the different types of budgeting that company’s use and the effects that budgeting has on companies using budgets are the success of a company. Without the budget the companies could go bankrupt not knowing if there is enough money to continue to conduct business. Budgets also help companies determine which departments are doing well with their current budget and which departments are in need of help or cuts from the company.
Andre, A. d. W. (2005). Is your organization ready for beyond budgeting? Measuring Business Excellence, 9(2), 56-67. Retrieved from http://search. proquest. com/docview/208748235? accountid=32521 Brewer, P. B. , Garrison R. H. , & Noreen, E. W. (2011). Managerial accounting for managers (2nd ed. ). New York, NY: McGraw Hill. Udo, S. I. (2012). The budget as a management tool: Zero base budgeting, panacea to budget implementation in Nigeria. Global Journal of Social Sciences, 11(1), 1-7. Retrieved from http://search. proquest. com/docview/1036581432? accountid=32521