Chapter 37 The Budget Process

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Chapter 37
The Budget Process
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Budgets

• What is a budget?
• An estimate of future costs, revenues, and
  financial position for a company
• Three basic types
• Capital Budgets
• Proposed expenditures for long term investments
• Operating Budgets
• Costs and revenues relating to operations
• Financial Budgets
• Proforma financial reports for a future period

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Budget Characteristics

• Prepared in advance
• Derived from a companys long-term strategy
• Relates to future periods
• Quantified in physical or monetary units
• Serves as a benchmark of expected performance

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The Planning Side of Budgeting

• Helps a company
• To quantify targets
• To determine direction in order to allocate
  resources
• To promote forward thinking
• To turn strategic objectives into reality
• To specify a means of achieving goals
• To communicate plans to other levels of
  management and employees

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The Controlling Side of Budgeting

• To aid in measuring performance
• To provide direction and co-ordination
• To assign responsibilities
• To motivate managers to achieve goals
• To improve efficiency
• To establish targets and standards

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What Can We Budget?

• Budgets can be in terms of
• Monetary or financial
• Time
• Acquisition and use of materials
• Manufacturing of products
• Attendance at a football game
• Pages of notes per class period

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Role of Budget Committee

• Responsible for approval of the various budgets
• Includes the senior managers, president, CFO,
  various vice-presidents and controller

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Budget Approaches
Top-down Approach
Goals are pushed down from top management
Lower-level managers are the primary source of
information used in setting the budget
Bottom-up approach
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Budget Time Period

• Range from months to several years
• Inverse relationship between the length of the
  budget period and the detail contained within the
  budget

Short Budget Period
Long Budget Period
Less Specific
Much Detail
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Zero Base Budgeting (ZBB)

• A method of budget preparation which starts from
  zero
• Managers must justify budgets every period
• Used primarily in government

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Reasons for Budget Variances
Managers may have done a very good or very
bad job
1.
Business or economic conditions may have changed
2.
Weak development of budget
3.
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Are Budgets Successful?

• Depends on
• Degree of support that top management gives the
  budget
• How top management uses budget information
• Timeliness of budget followup

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