As detailed in Accounting as a Tool for Managers , planning involves developing future objectives, whereas controlling involves monitoring the planning objectives that have been put into place.
To understand the benefits of budgeting, consider Big Bad Bikes, a company that manufactures high-end mountain bikes.
The company will begin producing and selling trainers this year. Trainers are stands that allow a rider to ride their bike indoors similar to the way bikes are used in spinning classes. Big Bad Bikes has a 5-year plan and has always been successful in managing its budget. They know that managing their departments is much easier when the budget is developed to support the strategic plan. The marketing department estimates that sales will be 1, units for the first two quarters, 1, for the third quarter, and 2, per quarter through the second year.
Management will work with each department to communicate goals and build a budget based on the sales plan. The resulting budget can be evaluated by all departments involved. In the long run, proper budget reporting assists management in making good decisions.
Management uses budgets to evaluate the performance of employees and their department. They can also use budgets to evaluate and benchmark the performance of a business unit in a large business organization or of the entire performance of a small company.
They can also use budgets to evaluate separate projects. In budgeting situations, employees may feel a tension between reporting actual results and reporting results that reach the predetermined goals created by the budget. This creates a situation where managers may choose to act unethically and pressure accountants to report favorable financial results not supported by the operations. Accountants need to be aware of this circumstance and use ethical standards when assisting the development and creation of budgets.
After a proper budget has been created, the reporting of the actual results will assist in creating a realistic and honest picture of the actual operations for the managers reviewing the budget. The budget accountant needs to take steps to ensure that employees are not trying to misreport the budget results; for example, managers might be tempted to set artificially low standards to ensure that targets are hit and significantly exceeded.
Such results could lead to what might be considered as excessive bonuses paid to managers. All companies—large and small—have limits on the amount of money or resources they can receive and pay out.
How these resources are used to reach their goals and objectives must be planned. The quantitative plan estimating when and how much cash or other resources will be received and when and how the cash or other resources will be used is the budget.
All budgets are quantitative plans for the future and will be constructed based on the needs of the organization for which the budget is being created. Depending on the complexity, some budgets can take months or even years to develop. The most common time period covered by a budget is one year, although the time period may vary from strategic, long-term budgets to very detailed, short-term budgets.
Management begins with a vision of the future. The long-term vision sets the direction of the company. The vision develops into goals and strategies that are built into the budget and are directly or indirectly reflected on the master budget. The master budget has two major categories: the financial budget and the operating budget.
The financial budget plans the use of assets and liabilities and results in a projected balance sheet. The operating budget helps plan future revenue and expenses and results in a projected income statement. The operating budget has several subsidiary budgets that all begin with projected sales. For example, management estimates sales for the upcoming few years. It then breaks down estimated sales into quarters, months, and weeks and prepares the sales budget.
The sales budget is the foundation for other operating budgets. This information in units and in dollars becomes the production budget. The production budget is then broken up into budgets for materials, labor, and overhead, which use the standard quantity and standard price for raw materials that need to be purchased, the standard direct labor rate and the standard direct labor hours that need to be scheduled, and the standard costs for all other direct and indirect operating expenses.
Companies use the historic quantities of the amount of material per unit and the hours of direct labor per unit to compute a standard used to estimate the quantity of materials and labor hours needed for the expected level of production.
Current costs are used to develop standard costs for the price of materials, the direct labor rate, as well as an estimate of overhead costs. The budget development process results in various budgets for various purposes, such as revenue, expenses, or units produced, but they all begin with a plan.
There are various strategies companies use in adjusting the budget amounts and planning for the future. For example, budgets can be derived from a top-down approach or from a bottom-up approach. Figure shows the general difference between the top-down approach and the bottom-up approach. The top-down approach typically begins with senior management. The goals, assumptions, and predicted revenue and expenses information are passed from the senior manager to middle managers, who further pass the information downward.
Each department must then determine how it can allocate its expenses efficiently while still meeting the company goals. The benefit of this approach is that it ties in to the strategic plan and company goals. Another benefit of passing the amount of allowed expenses downward is that the final anticipated costs are reduced by the vetting fact checking and information gathering process. In the top-down approach, management must devote attention to efficiently allocating resources to ensure that expenses are not padded to create budgetary slack.
The bottom-up approach sometimes also named a self-imposed or participative budget begins at the lowest level of the company. After senior management has communicated the expected departmental goals, the departments then plans and predicts their sales and estimates the amount of resources needed to reach these goals.
This information is communicated to the supervisor, who then passes it on to upper levels of management. The advantages of this approach are that managers feel their work is valued and that knowledgeable individuals develop the budget with realistic numbers.
A company that does no planning whatsoever chooses to deal with the future by default and can react to events only as they occur. Most businesses, however, devise a blueprint for the actions they will take given the foreseeable events that may occur. Companies can use budget-to-actual comparisons to evaluate individual performance. For instance, the standard variable cost of producing a personal computer at IBM is a budget figure.
This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers. We will do this type of comparison in a later chapter.
Many other benefits result from the preparation and use of budgets. The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to writing. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels.
For all these reasons, a budget must clearly reflect the expected results. Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult. Obviously, stable operating conditions permit greater reliance on past experience as a basis for budgeting.
As a result, budgeted performance is more useful than past performance as a basis for judging actual results. If these assumptions change during the budget period, management should analyze the effects of the changes and include this in an evaluation of performance based on actual results. Budgets are quantitative plans for the future.
However, they are based mainly on past experience adjusted for future expectations. Thus, accounting data related to the past play an important part in budget preparation. The accounting system and the budget are closely related. In turn, the accounts must be designed to provide the appropriate information for preparing the budget, financial statements, and interim financial reports to facilitate operational control.
Management should frequently compare accounting data with budgeted projections during the budget period and investigate any differences. Budgeting, however, is not a substitute for good management. Instead, the budget is an important tool of managerial control. Managers make decisions in budget preparation that serve as a plan of action. The period covered by a budget varies according to the nature of the specific activity involved.
Cash budgets may cover a week or a month; sales and production budgets may cover a month, a quarter, or a year; and the general operating budget may cover a quarter or a year. It is referred to as the "historical" approach because administrators and chief executives often base their expenditure requests on historical expenditure and revenue data. One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail e.
The line-item budget approach has several advantages that account for its wide use. It offers simplicity and ease of preparation. It is a familiar approach to those involved in the budget development process. This method budgets by organizational unit and object and is consistent with the lines of authority and responsibility in organizational units. As a result, this approach enhances organizational control and allows the accumulation of expenditure data at each functional level.
Finally, line-item budgeting allows the accumulation of expenditure data by organizational unit for use in trend or historical analysis. Although this approach offers substantial advantages, critics have identified several shortcomings that may make it inappropriate for certain organizational environments. The most severe criticism is that it presents little useful information to decisionmakers on the functions and activities of organizational units.
Since this budget presents proposed expenditure amounts only by category, the justifications for such expenditures are not explicit and are often unintuitive. In addition, it may invite micro-management by administrators and governing boards as they attempt to manage operations with little or no performance information. However, to overcome its limitations, the line-item budget can be augmented with supplemental program and performance information.
Performance Budgeting A different focus is seen in performance budgeting models. In a strict performance budgeting environment, budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity to be provided in that time period. The total budget for an organization is the sum of all the standard unit costs multiplied by the units expected to be provided. Although this strict approach may be useful for certain types of operations, many organizations require a more flexible performance approach.
For example, expenditures may be based simply on the activities or levels of service to be provided and a comparison of budgeted and historical expenditure levels. The performance approach is generally considered superior to the line-item approach because it provides more useful information for legislative consideration and for evaluation by administrators. Further, performance budgeting includes narrative descriptions of each program or activity-that is, it organizes the budget into quantitative estimates of costs and accomplishments and focuses on measuring and evaluating outcomes.
Finally, the performance approach eases legislative budget revisions because program activities and levels of service may be budgeted on the basis of standard cost inputs. However, performance budgeting has limitations owing to the lack of reliable standard cost information inherent in governmental organizations. Further, the performance approach does not necessarily evaluate the appropriateness of program activities in relation to reaching an organization's goals or the quality of services or outputs produced.
Consequently, the performance approach has become most useful for activities that are routine in nature and discretely measurable such as vehicle maintenance and accounts payable processing -activities that make up only a relatively modest part of the total educational enterprise. But in sum, performance budgeting may offer considerable enhancement to the line-item budget when appropriately applied.
Program and Planning Programming Budgeting PPB Program budgeting refers to a variety of different budgeting systems that base expenditures primarily on programs of work and secondarily on objects.
It is considered a transitional form between traditional line-item and performance approaches, and it may be called modified program budgeting. In contrast to other approaches, a full program budget bases expenditures solely on programs of work regardless of objects or organizational units.
As these two variations attest, program budgeting is flexible enough to be applied in a variety of ways, depending on organizational needs and administrative capabilities. Program budgeting differs from approaches previously discussed because it is much less control- and evaluation-oriented.
Budget requests and reports are summarized in terms of a few broad programs rather than in the great detail of line-item expenditures or organizational units. PPB systems place a great deal of emphasis on identifying the fundamental objectives of a governmental entity and on relating all program expenditures to these activities. This conceptual framework includes the practices of explicitly projecting long-term costs of programs and the evaluation of different program alternatives that may be used to reach long-term goals and objectives.
The focus on long-range planning is the major advantage of this approach, and advocates believe that organizations are more likely to reach their stated goals and objectives if this approach is used. However, several limitations exist in the actual implementation of this approach, including changes in long-term goals, lack of consensus regarding the fundamental objectives of the organization, lack of adequate program and cost data, and the difficulty of administering programs that involve several organizational units.
As with performance budgeting, PPB information may be used to supplement and support traditional budgets in order to increase their informational value. Zero-Based Budgeting The basic tenet of zero-based budgeting ZBB is that program activities and services must be justified annually during the budget development process. The budget is prepared by dividing all of a government's operations into decision units at relatively low levels of the organization.
Individual decision units are then aggregated into decision packages on the basis of program activities, program goals, organizational units, and so forth. Costs of goods or services are attached to each decision package on the basis of the level of production or service to be provided to produce defined outputs or outcomes. Decision units are then ranked by their importance in reaching organizational goals and objectives. Therefore, when the proposed budget is presented, it contains a series of budget decisions that are tied to the attainment of the entity's goals and objectives.
The central thrust of ZBB is the elimination of outdated efforts and expenditures and the concentration of resources where they are most effective.
This is achieved through an annual review of all program activities and expenditures, which results in improved information for allocation decisions. However, proper development requires a great deal of staff time, planning, and paperwork.
Experience with the implementation of this approach indicates that a comprehensive review of ZBB decision packages for some program activities may be necessary only periodically. Additionally, a minimum level of service for certain programs may be legislated regardless of the results of the review process. As a result, ZBB has had only modest application in schools, although the review of program activities makes ZBB particularly useful when overall spending must be reduced.
Site-Based Budgeting Site-based budgeting is widely considered the most practical for budgeting within the school district environment, by providing greater control and reporting of school-level data. This budgetary approach which may be used in combination with any of the four discussed above emphasizes the decentralization of budgetary decisionmaking.
Site-based budgeting places local managers and other staff at the center of the budget preparation process, making them responsible for both the preparation and the maintenance of the budget. Site-based budgeting is popular in many school settings. Within a school system, site-based budgeting generally involves granting increased budgetary authority to the school.
Resources are allocated to the site, with budget authority for programs and services granted to the school's principal and staff. Campuses are normally allocated a certain level of resources that they have the authority to allocate to educational and support services. These budgetary allocations are meant to cover those areas over which campus decisionmakers have control.
For example, schools that have authority over staffing decisions may be allocated funds for staff costs using the site-based budgeting approach. In contrast, school districts that make staffing decisions centrally may not allocate funds to the individual school site for staff costs.
The main advantage of site-based budgeting is that those who best understand the needs of a particular organization are empowered to make resource allocation decisions. This decentralization of budgetary authority may also increase local accountability.
Another potential advantage of site-based budgeting is the increased level of participation of the public and staff in budget development. Many site-based budgeting systems create committees composed of staff and community members to determine budgetary allocations. These committees give members a voice from the inception of the budget process, rather than merely when the budget is presented for public review and approval.
Although site-based budgeting may provide substantial benefits, it also has limitations. First, organizations with limited resources may not be capable of granting a meaningful level of site-based budgetary authority.
Even if an organization does have discretionary resources, it may be difficult to determine the areas of the budget for which local decisionmakers should be held accountable. Finally, site-based budgeting may be burdensome to some local managers, may increase conflict between staff or departments, or may limit the organization's ability to ensure quality and sufficiency in the services it provides.
These problems can be avoided somewhat through the careful design of site-based budgeting guidelines and through training for new budget stakeholders. Outcome-Focused Budgeting Consistent with the evaluation objective, government budgeting is becoming increasingly outcome-focused. Fiscal austerity, coupled with intense competition for governmental resources, has precipitated an effort to ensure more effective use of resources at all levels of government. Outcome-focused budgeting is the practice of linking the allocation of resources to the production of outcomes.
The objective is to allocate government's resources to those service providers or programs that use them most effectively. Outcome-focused budgeting is closely linked to the planning process in governments. For a government entity to focus on outcomes, goals and objectives must be identified and tied to budget allocations for the achievement of those objectives.
This premise argues that mission-driven synonymous with outcome-focused governments are superior to those that are rule-driven because they are more efficient, are more effective in producing desired results, are more innovative, are more flexible, and have higher employee morale Osborne and Gaebler In the context of increased governmental scrutiny of governmental costs, including schools, this model may receive more emphasis in the future.
The development of annual budgets is part of a continuing planning process. The advent of site-based decisionmaking in some states has increased the integration of planning and budgeting at the school level; however, state laws generally allow considerable district autonomy in budget preparation. The organizational structure of a district, including the size and complexity of its administration and the degree of centralization, will affect the budgetary approach, the budget development process, and the final budget document.
0コメント