Please identify at least three roles that budgeting plays in helping managers co
ID: 2420056 • Letter: P
Question
Please identify at least three roles that budgeting plays in helping managers control and monitor a business. What is the benefit of continuous budgeting? Please identify three usual time horizons for short-term planning and budgets. Why should each department participate in preparing its own budget? What limits the usefulness to managers of fixed budget performance reports? Please identify the main purpose of a flexible budget for managers. What type of analysis does a flexible budget performance report help management perform?
Explanation / Answer
Role of budget in helping managers
For the hands-on manager, maintaining an overview on the big picture is difficult when caught in the various crises and firefights of day-to-day operations. A budget provides a road map for performance that offers detailed information about expected outcome that a proactive manager can use to guide decisions toward desired goals.
Planning
As a manager looks forward over a period of business and prepares, he may consider how much material or staff is needed. When a budget shows expected sales over the same period, the manager can take budgeted costs of sales and work backwards to determine raw materials needs or labor hours required. Effective managers will consider adjustments based on current market conditions that may vary from the time the budget was devised. For example, if sales have been performing 3 percent over budget for several months, the manager may add this to his calculations.
Prioritizing
Comparing year-to-date performance to the budget may help a manager decide how to approach a problem or challenge. For example, if labor costs in a particular area are higher than budget, but new equipment purchases are under budget, a manager might requisition a new machine that helps reduce labor moving forward. In this case, the budget serves as a justification for a proposal. As an account item climbs over budget, it becomes a manager's priority to control.
Continuous Improvement
An effective manager is not just looking to meet budget, but also looks for ways to improve. With weekly or monthly performance numbers compared to budget, a manager is a first-level systems analyst for operations. Working at floor level, for example, a manager could work with employees for ways to increase throughput or reduce waste. The budget often provides clues as to where effort is most effectively focused to produce improved financial performance.
Forecasting
One year's budget often serves as a basis for the following year, and when managers are involved in the budgeting process, each of the previous steps can be applied looking forward. Managers may be in a unique position to observe the effects of improved staff training, for example, as a contributor to improved performance. Forecasting becomes a chance for an effective manager to reach beyond the bounds of his department to suggest changes that may create better conditions for financial success the following year.
Main purpose of flexible budget
A flexible budget is one that recognizes the relativity of line values to change in output or turnover during the budget period.
A budget is a plan comprising of many line values such as production costs, net profit, production volume, and the like. Comparison of the budget to actual results provides valuable information about performance. The most common type of budget is the static budget that projects a fixed level of output, costs of production, and net income before the start of the budgeting period.
What is a flexible budget? Flexible budgets, also known as variable or dynamic budgets, on the other hand change in accordance with the level of activity during the budget period. It recognizes the relativity of fixed and variable costs to fluctuations in output or turnover and make provisions to change line values depending on changes in output or turnover.
Purpose
What is the purpose of a flexible budget?
Flexible budgets help plan for potential changes in production costs or sales volumes, allowing businesses to respond quickly to changes and, thereby maximize profits by seizing the opportunity.
Flexible budgets are a performance evaluation tool aimed at allowing for a correct comparison between budgeted performance and actual performance. For instance, comparison becomes distorted if actual production is 10,000 units and the static budget estimates 9,000 units. Revising the original budget to 10,000 units makes possible a precise comparison between budgeted costs and actual costs, for the various line values reflect the values relative to the same output.
Approach
There are two approaches to preparing a flexible budget:
Preparation
Static budgets assign a fixed limit or value to each line item. Flexible budgets also assign such values to each line item, but also incorporates the provision to amend the line items if some unforeseen complication arises. For instance, delayed shipments of raw materials lead to slowdown in operations, and flexible budgets already have the revised values of the various line items that reflect this delay. Such a contingency approach minimizes the impact of unforeseen events.
Creation of a flexible budget at the start of a budget period is through a pro forma analysis that includes the following steps:
The steps to create a flexible budget at the end of the budget period include:
Why use a flexible budget? The popularity of flexible budgeting is attested by the fact that most of the major corporations of the world prepare this type of budget for attaining effective managerial control over their business operations.