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BUDGETS

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					BUDGETING
 Accounting Principles II
       Fall, 1999

                            1
        BUDGETS

• A plan expressed in numbers


• Financial plans for the future
                                   2
   PURPOSES OF BUDGETS
• Forces managers to plan & look at the
  future
• Provides resource information that can be
  used to improve decision making
• Provides a standard for performance
  evaluation
• Improves communication & coordination

                                              3
     TWO DIMENSIONS OF
        BUDGETING

• How the budget is prepared

• How the budget is used to
  implement the organization’s
  plans and to control operations

                                    4
           Elements Of The
           Operating Budget
•   Sales Budget
•   Production Budget
•   Direct Material Budget
•   Direct Labor Budget
•   Overhead Budget
•   Selling & Administrative Expense Budget
•   Ending Finished Goods Inventory Budget
•   Cost of Goods Sold Budget                 5
       Using Budgets For
     Performance Evaluation
• Budgets are useful control measures
• Two major considerations must
  consider when using for performance
  evaluation:
  (1) How budgeted amounts should be
      compared with actual results
  (2) How budgets and their use will effect
      human behavior                          6
Two Basic Types of Budgets

• Static Budgets

• Flexible Budgets

                             7
    The Behavioral Dimension
          of Budgeting
• Budgets often used to judge the actual
  performance of managers
• Bonuses, salary increases, and promotions
  are all affected by a manager’s ability to
  achieve or beat budgeted goals
• Budgets can therefore have a significant
  behavioral effect
• This effect can be positive or negative
                                               8
   Positive Behavioral Effects
• Occurs when
  – the goals of individual managers are aligned
    with the goals of the organization and
  – the manager has the drive to achieve these goals
• Goal Congruence
  – When the goals of the organization and the
    goals of the manager are aligned


                                                   9
    Negative Behavioral Effects

• When a manager or a subordinate subverts
  the organization’s goals

• Dysfunctional Behavior
  – When individual behavior is in basic conflict
    with the goals of the organization



                                                    10
       Characteristics of a Good
          Budgeting System
• One that promotes positive behavior
• Key Features:
  –   Frequent feedback on performance
  –   monetary and nonmonetary incentives
  –   participatory budgeting
  –   realistic standards
  –   controllability of costs
  –   multiple measures of performance
                                            11
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posted:8/18/2012
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