Budgeting.ppt

Planning and Control Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Control -- involves the steps taken by management that attempt to ensure the objectives are attained. Advantages of Budgeting Responsibility Accounting Managers should be held responsible for those items — and only those items — thatthe manager can actually controlto a significant extent. Choosing the Budget Period Choosing the Budget Period Participative Budget System The Budget Committee A standing committee responsible for overall policy matters relating to the budget coordinating the preparation of the budget Zero-Base Budgeting Managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The baseline is zero rather than last year’s budget. Budgets can be defined as: “a quantitative model, or summary of the expected consequences of the organization’s short-term operating activities.” Management Accounting Atkinson, Banker, Kaplan Young The definition suggests: Availability of quantitative data, Predictability of short-term outcomes, Clear-cut organizational structures. There is one major logical problem, which is? If the above are true, what do you need the budget for? The budgetary process is rather a process To quantify “qualitative” judgment, To forecast the impacts of some uncertain events, To simplify the complex organizational structures. As Zimmerman indicated (p.244), the budget process is a communication device involving both vertical and horizontal information transfer is a negotiation and internal contracting procedure is part of the performance evaluation system partition decision rights Budgets to Solve “Agency” Problems Short-term budgets as internal contracts. To formally commit responsibility centers As a warning for future monitoring actions Long-term budgets to reduce information asymmetry. To solicit private, specialized information from local managers Force ma