186 Accounting for Managers DISCUSSION ITEMS What Would Your Accountant Say? A g

Question

186 Accounting for Managers DISCUSSION ITEMS What Would Your Accountant Say? A good manager adheres to sound budgeting principles in order to meet the organization's mission effectively, efficiently, and productively. Your company has decided to revamp its current budgeting process, and the president, knowing you are in the process of completing your MBA, has invited you to spearhead the project. He asks you to explain some of the more prevalent aspects of good budgeting. What would your accountant say to the president? Theory vs. Practice In theory, the "Master Budget" of a manufacturing firm should include the following components: (1) sales budget, (2) production budget, (3) purchases budget, (4) cash budget, and (5) pro forma financial statements. In practice, however, many companies do not use a formal budgeting process as part o their financial planning, or they skip some of the steps outlined in the chapter. Describe the budgeting process used at your current place of employment, or if none, at organizations where you previously worked. PRORI FL

Explanation / Answer

Following are the more prevalent aspects of good budgeting;

1. Realism;

Budgets should be based on more accurate future quantities otherwise unrealistic information may lead to failure of overall budgeting process & budgets. Thus we can say that there should be more realistic approach in preparation of budgets.

2. Enviornment;

Good budgeting considers all relevant factors of environment. As we know that any business entity can not remain isolated from the enviornmental factors hence all internal & external factors of enviornment should be properly considered.

3. Proper range;

As we know that budgeting is based on future estimations and future estimations always carry some quantum of errors hence there must be a proper range about future estimations so that actual errors can be managed within this range.

4. Proper participation;

All employees those are directly & indirecty affected by the budgeting should be invited to participate in budgeting process because with the help of their suggestions & experiences budgeting process can be improves and organization will be in position to manage good budgets.

5. Appropriateness;

Budgeting process should focuss on providing appropriate information to the relevant managers in the organization. It is quite possible that a particular manager needs some more detailed type specific budget but it is not relevant for whole organization hence budgeting should result into final appropriate information.

6. Intregation;

There must be a proper connection between all budgets or a proper conection between all steps of budgeting otherwise it will not convey complete or meaningful messege to the users.

7. Continuation;

Budgets should be continuing in nature because an organization need budgets through out its’ life hence an organization should maintain a continuity in the budgeting process for getting proper results in all years.

8. Feedbacks;

It is duty of the management to find out variance from actual results because without knowing variances we can not improve out present budgeting process. Hence we can say that actual data must be compared with budgeted data to find out variances and for making proper modification in the process. Thus feedbacks are very important.

Master budgeting process;

In my previous organization a proper master budget process was adopted. As we know that master budget is known as interconnected budget or master budget is known as the summery budget of all sub-budgets. Hence without following a proper process, a good master budget can not be prepared. Thus following is the correct & fair process of preparing master budget;

1. First of all Sales budget should be prepared

2. Then Production budgets should be prepared because it will give idea about the actual resources needed

3. After that Purchases budget will be prepared

4. After this Cash budget should be prepared

5. At last Pro forma financial statements will be prepared.

It is also true that some organization may skip any one step but depending upon the internal & external circumistances but if we skip any step in this process then it will lead to the poor master budget hence above given process must be followed. In my previous organization above mentioned process was adopted.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.