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Bachelor’s Thesis Faculteit der Economische Wetenschappen Sectie: Accounting, Auditing and Control Studie: Bedrijfseconomie
Budgets
Is the use of budgets out of date?
S.A.D. Sardjoe 298142ss July 12, 2009
Table of contents
Chapter 1 Introduction 2
1.1 Purpose 2
1.2 Method 2
1.3 Scope 2
1.4 Outline 3
Chapter 2 Budgets 4
2.1 Definition of budgets 4
2.2 The use of budgets 5
2.3 The process of budgeting 5
2.4 The advantages of budgets 6
2.5 The disadvantages of budgets 7
2.6 Conclusion 8
Chapter 3 The relevance of budgets within Management and Control 10
3.1 Management control system
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The general definition of budgets is[1] : ‘Estimate of costs, revenues, and resources over a specified period, reflecting a management 's reading of future financial conditions[2].
Zimmerman (Accounting for Decision Making and Control, 2006) defines budgets as:’ A forecast of the revenues and/or expenses expected to occur within a future time period. Budgets are an integral part of the organization’s performance evaluation and decision rights partitioning system’. Hilton (Managerial Accounting: Creating Value in a Dynamic Business Environment, 2004) describes budgets as: ‘A detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time’.
Looking at the definitions above it is clear that there are many different opinions on how to define budgets.
For this thesis I have composed a definition of my own, which will be the main definition for the rest of this thesis. I describe budgets as: An estimation of costs, revenues and resources which will be used as a forecast to specify how resources will be acquired and used during a specified period of time.
2.2 The use of budgets
Budgets can be used in a various amount of ways. The most important ways to use budgets are (Drury 1992) : - planning of the yearly operational activities - coordinating of the activities of the different organization divisions - communicating the plans towards the
For example interest rates, the cost of raw materials including fuel, the number of sales or orders that we make and in turn all of these rely on other factors. The best therefore that can be done when developing a budget is to look at all the factors that are likely to affect the budget and decide how to take account of each one. If there is a previous budget (last year or last month) then it is sensible to look at how this has been achieved or not as the case may be, and what factors affected the outcome. If we are looking at monthly budgets it might be a better comparison to look at the same month twelve months ago as well as the previous months. The more factors we take into consideration when estimating a budget, the more accurate our budget will be.
5. How would you identify timescales, priorities and financial resources when preparing a budget? [2.3]
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).
Budgeting systems turn managers’ perspectives forward and by looking to the future and planning, managers are able to anticipate and correct potential problems before they arise (Horngren, Foster & Datar, 2000). Through budgeting, management can plan ahead and maintain enough cash to pay creditors, to have adequate raw materials to meet production requirements, and to have sufficient finished goods to meet expected sales (Kieso, 2002).
1. A budget is a formal statement of future plans, usually expressed in monetary terms.
A budget is an instrument used to help managers ensure that the resources used effectively and proficiently toward the goals of an organization. A budget projection can be made on a yearly base depending on previous year or existing one. They can further be broken down quarterly or monthly depending on it use. Generating a budget is complex undertaking, and for a budget to be effective the organization ought to follow it strictly. However, no matter how closely a business follows their guidelines there will always be some form of variances. The organization should expect a few variances and be able to work these discrepancies in any budget
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
Budget is the major financial and economic statement. The role of the budget is to keep track of the money coming in and the money going out. It is essential part of running any business effectively. It can help make a short and long term projections about financial situation, avert a financial crisis and plan for major financial changes.
Most entities and organization create budgets as a guide for controlling its spending, prediction of profit, and it expenditure as they progress toward a set goal. Budget involves pulling resources together to achieve a specific goal. According to Gapenski (2006), budgeting is an offshoot in a planning process. A basic managerial accounting tool use in holding planning and control functions together is referred to as set of budgets (p. 255). One major setback manager or budget developer encounter is trying to design a future, a process that cannot be created with the precision just right. This article highlights some financial management
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
“It’s clearly a budget. It’s got a lot of numbers in it” (George W. Busch 2005). This definition of a budget can be supplemented using the Oxford dictionary, which states that a budget is an estimate of income and expenditures for a set period of time. Nowadays almost every business uses budgets and managers use them as a tool in order to set targets. In other words managers can, with the use of budgets, explain in a financial way what are the
Budget is a comprehensive business plan for procuring and appropriating a firm’s financial resources over a specified time period.
A budget is a financial statement which is an estimate of income and expenditure of a set period of time, which may include planned revenues, expenses, assets, liabilities and
Budget and budgetary control practices are undeniably indispensable as organizations routinely go about their business activities and operations. These organizations are constantly on the alert on how actual levels of performance agree with planned or budgeted performance. A budget expresses a plan in monetary terms. It is prepared and approved prior to a particular budgeted period and explicitly may show the income, expenditure and the capital to be employed by organizations in achieving their goals and objectives.