Budgets are an important part of managers’ planning and control responsibilities. Many organizations use budgets as a tool for making resource allocation decisions for the upcoming financial period, or several periods ahead. In this way, budgets help managers make decisions about how to allocate resources to the departments where they will be used the most efficiently, to plan for the future, to prepare for emergencies, and to identify potential bottlenecks in the organization. Budgets are also an important tool for communicating management’s financial objectives and to coordinate the different objectives of different departments. These objectives can then be used as a benchmark for an organization’s actual results and to determine areas where results were significantly different than projected.
Most organizations have master budgets, which generally culminate in a budgeted income statement, balance sheet, and cash flow statement. As part of the master budget, a number of specific budgets are also created for activities such as sales, production, inventory purchases and finished goods inventory, direct materials and direct labor, manufacturing overhead, and SGA (selling, general and administrative expenses).
Flexible budgets are also used to help control for overhead costs. For example, the budget variance measures the difference between the actual fixed overhead costs and the budgeted fixed overhead costs. The volume variance is the fixed portion of the predetermined overhead rate * (denominator hours – standard hours allowed). Managers use these variances to help measure performance. (See Standard Costing and Measuring Performance).
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: A detailed plan for the acquisition and use of financial and other resources over a specified time period.
A 12-month budget that rolls forward one month as the current month is completed.
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager’s supervisor and any issues are resolved by mutual agreement.
A group of key management personnel responsible for overall policy matters related to the budget program, coordinating the preparation of the budget, handling disputes related to the budget, and approving the final budget.
A method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the first time.
A budget designed for only the planned level of activity.
The basic idea of the flexible budget approach is that the budget is adjusted to show what revenues and costs should be for a specific level of activity. Flexible budgets use standard costs.
The difference between actual and flexible budget amounts for revenues and expenses.
The difference between actual and static budget amounts for revenues and expenses.
The difference between flexible and static budget amounts for revenues and expenses.
A type of budgeting in which emphasis is placed on budgeting the costs of the activities needed to produce and market the firm’s goods and services.