Approaches to Budgeting - Budgetary Control, Cost Accounting Video Lecture | Cost Accounting - B Com

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budgets are quantitative plans prepared
for a specific timeframe or accounting
period if an organization wants to
improve performance accuracy with
budgets is important
budgets help with planning communication
coordination control authorization
motivation evaluation and delegation
planning and forecasting budgets forces
an organization to look to the future
which in business is essential for
survival communication the budget is a
formal communication channel between
senior and junior staff utilized junior
staff see what is expected of them
coordination budgeting allies
coordination between all departments
towards common goals control with
budgeting actual results are compared
against budgeted results any corrective
action needed can then be taken auto is
a ssin budgets act as a formal method of
authorization for management for example
an expenditure staff hiring and
operational plans motivation budgets
provide a goal for employees to work
towards rewards can be used for further
motivation low budget targets can pull
down performance as employees are only
motivated to meet the bare minimum
target set while unachievable targets
are habitually high targets may be
demotivational because employees will
not believe that they can be met the
ultimate aim of budgeting is to get
employees and managers to work together
towards the same goals this aim
underlines motivation evaluation
budgeting can be used to evaluate
management results either departmentally
or as a whole and delegation budgets
help with delegating responsibilities to
management and employees budgets can be
top-down which is where a budget is set
by management and imposed on the budget
holder the benefits of top-down budget
preparation is the avoidance of
budgetary slack and dysfunctional
behavior senior management retain
control which can make the budget
preparation quicker and avoid the
problem of poor decisions being made
from in experienced managers imposed
budgets can be effective when managers
lack resources or expertise the downfall
is that it may be demo
motivational managers may resent targets
which aren't negotiated
budgets can be bottom-up which is where
the budget involves participation from
the budget holder in its setting the
benefits of bottom-up budget preparation
is improved motivation and increased
divisional management understanding the
budget can be paired using local
knowledge held by the divisional manager
and it frees up the senior manager to
pursue other activities participatory
budgets are more beneficial when
managers are more experienced and have
more control over resources they take
longer to prepare but may contain slack
fixed budgets our budgets prepared for
one particular activity level they are
easy to prepare an adequate for small
fairly straightforward businesses
operating in highly stable conditions
but they do not compare like with like
meaning budgetary variable comparisons
may be misleading the approved plan may
not be the optimal achievable plan
because the fixed budget does not take
into account a full range of activity
levels and decision variables
on the other hand flexible budgets our
budgets designed to show realistic
targets for the actual activity level of
an organization for a particular period
they enable better understanding because
you're comparing like would like making
control activity more effective this is
because management would have access to
a range of forecasted results for a
range of different activity levels and
decision variables they will be able to
carry out sensitivity analysis to see
the effect of change on different
variables flexible budgets may be
demotivational to staff they may be seen
as moving the goal posts
with incremental budgets the budgets
start from the previous period and an
amount is either added or subtracted
this can be an adjustment for inflation
or other variables such as exchange
rates incremental budgets are suitable
for stable businesses where costs do not
change significantly good cost control
and limited discretionary spending is
required incremental budgets are quick
and easy to produce in that you're using
the previous periods budget just adding
an incremental amount managers are not
encouraged to question the
appropriateness of last year's
activities or methods of operation the
drawback with this is the previous
year's inefficiencies are perpetuated
and inappropriate uses of resources are
not curtailed an adverse behavioral
impact may occur as managers may be
encouraged to spend up to the budgetary
limit in order to secure funding for the
next budgetary period
rolling budgets is where the budget is
kept continuously up-to-date rolling
budgets are suitable for businesses
where accurate forecasts cannot be made
this could be say a new business or
business in a very dynamic or changeable
industry this type of budgeting suits a
business that needs very tight controls
on costs the advantages of rolling
budgets are that they tend to produce
more accurate and relevant budgets
providing better information to review
performance management the disadvantages
are that it is time-consuming and costly
focus may be shifted from actual results
to budgetary work rolling budgets can be
demotivational because goals are
ever-changing and with rolling budgets
there's a danger that management may not
take the budgeting process seriously a
rolling budget may just become an
incremental budget