Question

In: Finance

Think about the organisation that you work for or one with which you are familiar and...

Think about the organisation that you work for or one with which you are familiar and make a note of your answers to the following questions:

  • How would you describe the process of budget setting within the organisation?
  • How involved is your function or business unit in the process of budgeting?
  • What are the key areas, if any, where you feel your function or unit makes a positive contribution to the budget-setting process?
  • What are the main costs of your function/unit to the organisation, and how are these assessed?

Solutions

Expert Solution

Participatory budgeting means that all levels of management responsible for actual performance actively participate in setting operating goals for the coming period. Managers and other employees are more likely to understand, accept, and pursue goals when they are involved in formulating them.

Process of Budget Setting:

Step 1. Specification and Communication of Organizational Objectives

Budget is a medium through which organization's objectives and policies are reflected. It is essential to understand specification and documentation of organizational objectives before the managers start for budgeting the organizational activities.

Step 2. Determination of Principal budget factor

When a factor is of such importance that it influences all other budgets so that the coordination must be centered round it, it is known as 'principal budget factor'. It has been defined as the factor the extent of whose influence must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfilment.

Eg. of principal budget factors:

Sales activity: Low demand, shortage of skilled personnel, insufficient advertising etc.

Plant capacity: Shortage of capital, import restriction, lack of space etc.

Labour: General shortage of skilled workers.

Step 3. Establishment of clear lines of authority and responsibility

An organisational chart defining clear lines of authority and responsibility of managers is to be prepared.

Step 4. Establishment of budget centres

The entire organisation is divided into different segments, referred to as 'budget centres', which are clearly defined for the purpose of budgetary control according to responsibilities of department heads.

Step 5. Determination of budget period

Period for which the budget is being prepared. It can be a long-term or short-term budget.

Step 6. Establishment of budget committee

The setting up of budget committee is necessary in case of large and complex organisations. As the budget involves various functional activities, an association of functional managers is essential for satisfactory formulation and implementation of the budget.

Step 7. Appointment of budget controller

Proper budget administration is facilitated by the budget controller who is made responsible for the preparation of budget and coordinating activities of the individual departments.

Step 8. Preparation of budget manual

Budget manual is the documentation of policies and procedures involved in implementation of budgetary control system.

Step 9. Other Requirements

- Preparation of Master Budget

- Negotiation of Budgets

- Coordination and Review of Budget

- Acceptance and Communication of Budget

- Budget monitoring


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