Budget Part1

ACCA F2 - Management Accounting


Budget is quantitative interpretation, presentation and analysis of purposed future activities for defined future period. Budget increases confidence on achievement of perceived outcome. It decreases cost and revenue uncertainty by prudential estimation of activities, situation and by quantification of qualitative variables. Budget varies by type and purpose. E.g. Divisional budget, Project budget, Functional budget, Cash budget, Revenue budget, Master budget

Budget making (budgeting) may or may not require consent form subordinate. Members in participative budget committee represent broad area of organisation. The budget from this type of committee reflects participation by employees at all level and it promotes sense of ownership to all staffs. On the other hand the budget committee made of only senior staff is mostly autocratic in nature which tries to exert pressure on managers and employees to act as directed. Top-down method of communication is widely in practice for autocratic committee. Whatever the approach is, budget sets target and reward for achieving and outperforming target. The reward system in budgeting should define "standards" (Achievability, fairness/Equity and Ownership) and "measures" (Clarity, Motivation and Controllability). Standards and measures are two building blocks for performance measurement defined by Fitzgerald and Moon.

Budget setting (budgeting) follows defined steps. First budget committee is formed (discussed above) and the procedures for budget committee are set. Schedules for meeting and other preliminary arrangements are done. Then the committee identifies the constraints and the variables and takes prudential approach to forecast and project spending and revenue. Then final draft is prepared which outlines the budgeted target. This is carefully reviewed and adjusted over budgeted period.

Purpose of budget: A 3C DE PM (i.e. Authorization, Controlling, Coordination, Communication, Delegation, Evaluation, Planning and Monitoring) These are discussed below:

Ø  Authorisation - managerial freedom for discretion staying within budget limit

Ø  Controlling - appropriate action to curb unnecessary expenses and stay within budget

Ø  Coordination - efficient use of human resource to achieve corporate goal

Ø  Communication - to enhance performance and achieve the expectations/targets

Ø  Delegation - encourages active involvement of junior staff to achieve budget target

Ø  Evaluation - of performance which can be influenced by the discretion of manager

Ø  Planning - to meet the changes in environment staying focused on company's goal

Ø  Motivation - to beat target and achieve performance reward

Budgeting Practice and Organisational Structure