Question

A budget slack occurs when subordinates (a) ask excess resources above and beyond what they need to accomplish budget objectives and (b) distort information by claiming they are not as efficient or defective at what they do, thus lowering management’s performance expectations of them.

1. Describe in your own words what a budget slack is. What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?

Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was the lack of any financial planning. The company made a good product and market potential was great.

1. Explain why a company needs a good budgeting plan. Specifically, address the need for a master budget.
2. Describe some of the drawbacks of using the operating budget as a control device.

Based on your reading and understanding of the material you have learned this week, write a 1-2 page essay consolidating the above answers to the questions. Be sure to format your response to conform to APA.

Answer 1

The master budget is a comprehensive financial planning document. It usually includes all of the lower-level budgets within the operating budget and the financial budget. The operating budget shows the income-generating activities of the firm, including revenues and expenses. The result is a budgeted income statement

Importance;

It Helps Ensure You Don't Spend Money You Don't Have. Creating a budget helps you understand how much money you have, how much you have spent, and how much money you will need in the future. A budget can drive important business decisions like cutting down on unwanted expenses, increasing staff, or purchasing new equipment

A master budget is an aggregation of lower-level budgets created by the different functional areas in an organization. It uses inputs from financial statements, the cash forecast, and the financial plan. Management teams use master budgets to plan the activities they need to achieve their business goals. In larger organizations, the senior management is responsible for creating several iterations of the master budget before it is finalized. Once it has been reviewed for the final time, funds can be allocated for specific business activities.

Another advantage of having a master budget is the ability to identify problems and plan ahead. For example, the master budget can show you if one department is spending beyond its limit, causing the company to spend more than it is earning each month. To fix the problem, you can identify which department is spending excessively by looking at the individual department budgets. Then you'd either cut that department’s expenses, or make cuts in other departments to free up resources to cover that additional spending. It is more difficult to spot budget issues by only looking at individual department budgets.

Drawback: Lack of Specificity

One of the disadvantages of having a master budget is its lack of specificity. The dollar amounts and numbers written on the master budget are a collective sum of all of the departments’ expenses and earnings. For example, you wouldn't be able to determine how much the marketing department is spending on a monthly basis as the amount will be added to all of the other departments' spending as one sum.

Drawback: Difficult to Read and Update

Another disadvantage of a master budget is it's difficult to update. This is because of the many categories and numbers that are included in the budget. Due to the extensive descriptions and charts, a master budget can also be difficult to read and understand. Keep in mind that the master budget includes all expenses and income statements of the entire business, so this can be rather extensive if the business is a corporation or has hundreds of employees in many departments.