Question

Exercise 21-1 ( Short Essay)

Trusler Company has always done some planning for the future, but the company has never prepared a formal budget. Now that the company is growing larger, it is considering preparing a budget.

Write a small memo to Jim Dixon, the president of Trusler Company, in which you define budgeting, identify the budgets that comprise the master budget, identify the primary benefits of budgeting, and discuss the essentials of effective budgeting.

Answer 1

To:Jim Dixon

Subject: budgeting

Budgeting is a process by which the activities to be performed to prepare a budget are detailed out . Budgeting is a process by which estimates about the future are made in terms of sales , future cash collections and spending, future day to day activities etc.This helps the company in setting its future targets and goals.

Budgets that comprise in the master budget are as follows:

1. Direct labour budget
2. Direct material budget
3. Production budget
4. Sales budget
5. Ending finished goods budget

Primary Benefits of Budgeting are as follows:

1. It shift the focus of the organization from the day to day activities and management to a long term perspective, It makes the company to constantly think about the company’s competitive and financial position and find ways of improving it.
2. It helps the organization to understand the amount of funds needed for its operation so that the treasurer can plan and identify sources for the company’s funding needs.
3. Organisations can work out their goals with their employees so that they can also set bonuses and other incentives which are tied to the performance of the employees. A comparison of the budgets with the actual figures will help in giving the employees a feedback on how far the goals of the organization have been achieved.
4. Since all companies face the issue of bottlenecks , budgeting helps in understanding the action to be taken in terms of expanding the capacity of the bottleneck or to shift work around it.

Essentials for an effective budgeting are as follows:

1. Budgeting to be successful would require the company to have a sound organization structure wherein the roles and responsibilities are clearly demarcated and there is proper delegation from the top level so that the employees at all participate in the decision making and are also a part of the whole budgeting process.
2. Adequate Data: There should be an adequate and continuous flow of information and the accounting data must provide accurate data which forms the basis of the budgets.
3. Sound Forecasting: the success of the entire budgeting activity depends on the sound forecasting and executives focus on this aspect to improve the profitability situation
4. Support of top management: The process of budgeting will be successful and will be able to contribute to the goals set only if the top management gets enthusiastically involved in this whole budgeting exercise and cooperate at every stage of this process.