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Budgeting (Stages of budget setting (communicate details of budget policy…
Budgeting
Stages of budget setting
- communicate details of budget policy and guidelines
- determine factors that restrict output
- Preparation of the sales budget
- Intial preparation of budgets
- Negotiation of budgets with senior management
- Co-ordination and review of budgets
- Final acceptance of budgets
- Ongoing review of the budgets
Aim of budgeting
- To aid the planning of actual operations
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- Ensure the achievement of the organisations objectives
- To co-ordinate the activities of the organisation
- To communicate plans to responsible managers
- Everyone should have clear definition of their role in the organisation
- Making sure appropriate individuals are made accountable for implementing the budget
- to motivate managers to strive to achieve the budget goals
- To establish system of control
- To evaluate the performance of managers
Types of Budget
Incremental budgeting
- This is the traditional approach to budgeting
- The budget is based on last years plus more for estimated growth or inflation
- It is effective if the current budget is as economical, efficient and effective as possible
- Most suitable for businesses that cost is not likely to change significantly
Zero based budgeting
- The budget is started at scratch and each cost must be justified
- It helps add value for money as long standing assumptions are questioned
- Forces budget holders to avoid wasteful expenditure
Rolling budgets
- Actual conditions change from the original budget and plans may need to change
- Rolling budget is consistently updated by adding a further period and deducting the first
- Up to date and current in terms of expectations
- Planning and decision making is based on a more realistic budget
Fixed vs flexible
Fixed
- Remains unchanged regardless of level of activity.
- Budget produced based on level of sales and it not changing
Flexible
- Change depending on the level of activity and take into account different costing behaviours
- At the end of each month there is budget monitoring
Budgets
- Budget is a financial plan for a forthcoming accounting period
- What an organisation is aiming for and then is set as a target
- Budget can be set from the top down or the bottom up
- Both flexible and rolling budgets are advantageous in times of uncertainty
In times such as ...
- sales are higher or lower than forecast
- rapidly changing customer requirements
- fluctuations in costs of materials
- Problems with employees or machines
- competitors moving into the market
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