The Budgeting Process Essay Example

The Budgeting Process Paper The budgeting process pulls together the plans to each manager in the organization. 9-Nan example of using the budget to allocate resources in a university is found in the area of research funds and grants Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process. The flowchart on the following page depicts the components Of the master budget for a service station. 9-general economic trends are important in forecasting sales in the airline industry, The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air, 9-operational budgets specify how an organizations operations will be carried out to meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of repressions personnel of various types required to carry out the hospitals mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash budget showing planned cash receipts and disbursements. Flowchart for Review Question 9-4 7. Application of activity-based costing to the budgeting process yields activity- based budgeting (ABA). Under BABY the first step is to specify the products or services to be produced and the customers to be seerÐ’Â »deed. We will write a custom essay sample on The Budgeting Process specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on The Budgeting Process specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on The Budgeting Process specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Then the activities necessary to produce these products and services are determined. Finally the sources needed to perform the specified activities are determined. ABA differs from traditional budgeting in the emphasis that it places on activities and its use of activity-based costing data in the budgeting process. 8. E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise. The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise. -9th city of New York could use budgeting for planning purposes in many ways. For example, the citys personnel budget would be important in planning for required employees in the police and fire departments, The citys capital budget would be used in planning for the replacement of the citys vehicles, computers, administrative buildings, and traffic control equipment. The citys cash budget would be important in planning tort cash receipts and disbursements, It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash deeds at all times. 10. The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and deadlines to employees throughout the organization, the budget director often develops and disseminates a budget manual. -11 The budget manual says Who is responsible for providing various types Of information, when the information is required, and what form the information is to take. The budget manual also States Who should receive each schedule when the master budget is complete. -12 A companys board of directors generally has final approval over the master budget. By exercising its authority to make changes in the budget and grant final approval, the board of directors can wield considerable influence on the overall direction the organization takes. Since the budget is used as a resource- allocation mechanism, the board of directors can emphasize some programs and curtail or eliminate others by allocating funds through the budgeting process. 9-13 Under zero-base budgeting, the budget for virtually every activity in the organization is initially set to zero. To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness. The zero-base budgeting approach forces management to rethink each phase of an organizations operations before allocating resources. -AAA master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. Many other assumptions are used throughout the rest of the budgeting process. 9-15 The difference between the revenue or cost projection that a person provides in the budgeting process and a realistic estimate tooth revenue or cost is called budgetary slack. Building budgetary slack into the budget is called padding the budget. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. Cost estimates are often inflated, and revenue estimates are often understated. In this situation, the budget loses its effectiveness as a planning tool. -16 An organization can reduce the problem of budgetary slack in several ways. First, it can avoid relying on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections. -17 The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that this is our budget, rather than the feeling that this is the budget you imposed on us. When employees feel that they were part Of the budgeting recess, they are more likely to strive to achieve the budget. 9-18 This comment is occasionally heard from people who have started and run their own small business for a long period of time. These individuals have great knowledge in their minds about running their business. They feel that they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by feel. This approach can result in several problems. First, if the person who is running the business is sick or traveling, he or she is not available to make decisions and implement plans that could have en clarified by a budget. Second, the purposes of budgeting are important to the effective running of an organization. Budgets facilitate communication and coordination, are useful in resource allocation, and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits putout a budgeting process. 9-19 In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal needs, and money for entertainment and miscellaneous expenses. 9-20 Firms with international operations tact a variety of additional challenges in preparing their budgets. ; A multinational firms budget must reflect the translation of foreign currencies into u. S. Liars. Almost all the worlds currencies fluctuate in their values relative to the dollar, and this fluctuation makes budgeting for those translations difficult. It is difficult to prepare budgets when inflation is high or unpredictable. Some foreign countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and complicates a multinationals budgeting process. ; The economies Of all countries fluctuate in terms Of consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies With foreign operations face the task Of anticipating such changing conditions in their budgeting processes. -21 The five phases in a products life cycle are as follows: (a) Product planning and concept design (b) Preliminary design (c) Detailed design and testing (d) Production (e) Distribution and customer service It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle Will cover all Of the costs to be incurred. A large portion of a products life-cycle costs will be committed ell before they are actually incurred. 9-22 (a) Ordering costs: The cost of preparing, placing, and receiving a purchase order. Examples include the clerical costs of preparing purchase orders, time spent finding suppliers and expediting orders, transportation, and receiving costs, such as unloading and inspection. ) (b) Holding costs: The cost incurred in keeping inventory on hand for some period of time. (Examples include the costs of storage space such as a warehouse, depreciation, security, insurance, forgone interest on working capital tied up in inventory, and the costs of deterioration and theft. (c) Shortage costs: The cost incurred by the organization when it does not have materials or finished goods on hand when needed. Examples include the costs caused by disrupted production when raw materials are unavailable, lost sales, dissatisfied customers, and the loss of quantity discounts on purchases. ) 9-23 The EX. approach assumes that some inventory must be held. The objective of the model is to balance the cost of ordering against the cost of holding inventory. In contrast, the KIT philosophy is to reduce all inventories to the absolute minimum, eliminating them completely if possible. The KIT viewpoint asserts that inventory holding costs tend to be higher than may be apparent because of the inefficiency and waste involved in storing inventory.