1. Describe the company that you currently work for, have previously worked for, or would like to work for in the future. Determine at least two (2) compelling reasons that this company should prepare and manage a budget. Predict the two (2) most likely positive and negative financial outcomes for this company if it properly or improperly performs effective budgeting.
Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out what aspects of the business produce money and which ones use it, which forces management to consider whether it should drop some parts of the business, or expand in others.
Cash allocation. There is
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In addition, if a company uses participative budgeting to create its budgets on a rolling basis, the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.
Advantages and Disadvantages of the Rolling Budget
This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.
A flexible budget includes formulas that adjust expenses based on changes in actual revenue or other activities. The result is a budget that is fairly closely aligned with actual results. This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels. Advantages of Flexible
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Several issues are:
◾Many costs are not fully variable, instead having a fixed cost component that must be derived and then included in the flex budget formula.
◾A great deal of time can be spent developing step costs, which is more time than the typical accounting staff has available, especially when in the midst of creating the more traditional static budget. Consequently, the flex budget tends to include only a small number of step costs, as well as variable costs whose fixed cost components are not fully recognized.
◾The flexible budget model usually only works within a relatively limited revenue range; the budget analyst is unlikely to spend the time developing a more wide-ranging model if it is considered unlikely that outlier revenue amounts will be encountered.
TEXTBOOK CHAPTER 22 http://www.accountingtools.com 4. Imagine that the company is facing a financial challenge that is causing the actual amounts of money that it spends to become significantly off target from its budgeted amounts. Prepare an action plan to resolve the budget misalignment. In your action plan, recommend at least one (1) budgeting technique to resolve the budget and actual discrepancies. Provide a rationale for your
In Part II, Section D, it mentions that the salaries of the managers are fixed cost while the salaries of the staff are variable costs. I wanted to know how to represent that in my excel spreadsheet. In the meet session, I learned that the fixed salary of the managers amounted to $800,000 and through subtraction from the total salary amount of both the managers and the staff of $6,900,000 resulted in the budgeted variable cost of $6,100,000 for the staff salary. Furthermore, calculating the variable salary of the staff to 10 percent above produces a salary of $6,710,000 while 10 percent below produces a salary amount of $5,490,000. As a result, I was able to complete flexible budget data in my excel spreadsheet.
For government budgeting to be effective, the process that guides it must be an evolving one. As the government gets bigger, it will most likely destabilize the existing method. Therefore, it must change to keep pace with the demands and growth of the country. The process must be capable of handling the complexity of our nation and its multifaceted needs so it will always need revisions and restructuring to face these new challenges. Its ultimate goal must be to reinforce the government and strengthen the country.
In this essay these issues will be discussed: Financial tools from chapter 5 that can help make better financial decisions, components of a comprehensive budget, purpose of each component, how are specialized budgets prepared?, and the relationship of specialized budgets to the comprehensive budget.
There are some valid examples from literatures as to why budgets are may be unnecessary tool in a company. The problem with budgets is that the managers may be rewarded when the planned budgets are achieved. This system may lead a poor quality of budgets, because the managers would most probably only focus on achieving the target and will try to set lower goals. Jensen (2003, p.381) stated that people is getting rewards for lying in the budget-based system; as a matter of fact, the reality is that in most organizations would use budget system that rewards people for ruining important information and punishes anyone who does something that give benefit the organization. This type of activity is certainly unhealthy and completely misused the budgeting system. Other than that, if a company have a fixed-performance contract, may lead the managers into fear that if they do not spend any left overs in the budgets by the end of the year, their funding in upcoming years will be cut down (Gary, 2003). Based on Hackett survey, it showed that between 60 per cent and 90 per cent from the top 2000 global companies implement this type of contract. Hence, these practices are not that practical and may drag down the company’s performance. As stated by Welch (2005 cited in Libby and Lindsay, 2010, p.56) that budgets may conceal any opportunities and stunt growth of the
Budgets Budgeting must be tied to the mission of the organization. The leadership can look at past trends through accounting and see trends of where revenue comes from and from what sources. Leadership can then approve a budget that can be justified by the past and that will take the organization to the destination that the mission promises. Tweaks along the way will help keep things on course. Just as a ship moves toward a destination, storms and errors can move it off course.
Budgetary planning may differ between organizations. Single-period budgets and rolling budgets have methodologies that provide advantages and disadvantages that may make one budget time frame better than another. A single-period may require less time in planning during a fiscal year, but is less accurate than a rolling budget that is continuously planned on a repetitive basis. In either case, budgets are planned in advance in order for a company to operate profitably, and less so to have "actual results equal budgeted results." (p. 496)
In addition, this will also help answer many questions, such as the need for a system/process to decrease the number of commutes, the need for a budget on mileage and/or the need for salaries to be increased to compensate for those miles, the need for an allowance for rental cars for clients to use to eliminate the mileage employees are putting on their cars and the amount of money that is being paid out for that mileage, and etc. In Managerial Accounting, it is very important that the company receives the correct information. In chapter 23 of Horngren’s Accounting it states, “flexible budget summarizes revenue and expenses for various levels of sales volume within a
In conclusion, the advantages of participative budgeting include an increase and transferral of information, an increase in subordinate morale and job satisfaction, the development of negotiation skills and goal congruence. However these advantages only come into full affect when particular conditions are present, without these conditions it may turn into a disadvantage through budgetary slack, low job satisfaction and responsibility.
The accuracy of budget projections was also monitored during the year and formally revised on three occasions. The first of these occasions occurs in the March meeting of the Executive Committee. Each Executive Committee member is asked to update the Committee on his most recent estimates of sales and profits for each operating company for the current year. Herb Stolzer is dependent on Roy Black to provide this information for Stolzer’s review prior to the March
Hence the above example shows that costs can be determined as either fixed or variable even in a semi variable cost.
One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organisations use can be categorised in one of two ways: traditional methods and discounted cash flow techniques.
An advantage of performance budgeting would be transparency; this type of budgeting allows stakeholders the ability to ascertain the amount of service delivered for the funded cost. Basically it measures to what extent does government agencies getting what they paid for. This type of budgeting also provides an avenue by which management and line staff can contribute feedback for the enhancement of a program’s success.
As time goes on, you will find that your original budget has some slaws. Some areas of budget planning might be overestimated, and some areas might be underestimated. Some of the flaws in budget making, for instance, are unemployment because if a person gets unemployed he has to have a strict budget to follow. For example making home food and not going out because that will result him in debt. Some of the other flaws are increase in rent, increase in car insurance because of accidents occurring, credit card payments, groceries, and eating out with friends. All of these flaws can cause a person to be more in debt and cau...
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support
In management accounting, cost management has a crucial role and finds its foundations in understanding “cost behaviour”. “Cost behaviour analysis” can be defined as “the study of how cost changes when there is a change in an organisation’s level of activity”. (Definition https://www.accountingcoach.com/blog/what-is-cost-behavior).