Question

Identify at least three benefits and two negatives outcomes of budgeting.

What are the normal time horizons used for short-term planning?

What is the advantage of having departments participate in the budgeting process?

Why do we begin the budgeting process with the Sales budget?

Managerial Accounting Course

What is a capital expenditures budget and how is it developed?

Answer 1

Q.1 Identify at least three benefits and two negatives outcomes of budgeting.

Answer : A budget is a comprehensive financial plan setting forth the expected route for achieving the financial and operational goals of your business. Budgeting is an essential step in effective financial planning. Even the smallest business will benefit from preparing a formal written plan for its future operations. However, there are some advantages and disadvantages to consider:

Following are benifits of budgeting :

1. Planning orientation. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget - at least it is thinking about the company's competitive and financial position and how to improve it.
2. Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out what aspects of the business produce money and which ones use it, which forces management to consider whether it should drop some parts of the business or expand in others.
3. Assumptions review. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which management decides to operate the business.
4. Performance evaluations. You can work with employees to set up their goals for a budgeting period, and possibly also tie bonuses or other incentives to how they perform. You can then create budget versus actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is most common with financial goals, though operational goals (such as reducing the product rework rate) can also be added to the budget for performance appraisal purposes. This system of evaluation is called responsibility accounting.

Following are negative outcomes of budgeting :

1. Time required. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software. The time requirement can be unusually large if there is a participative budgeting process in place, since such a system involves an unusually large number of employees.
2. Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem and requires considerable oversight to spot and eliminate.
3. Blame for outcomes. If a department does not achieve its budgeted results, the department manager may blame any other departments that provide services to it for not having adequately supported his department. • Expense allocations. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used.

Q.2 What are the normal time horizons used for short-term planning?

Answer : Time horizons are largely dictated by investment goals and strategies. For example, saving for a down payment on a house, maybe 2 years, would be considered a short-term time horizon, while saving for college a medium-term time horizon, and investing for retirement a long-term time horizon.

• Strategic Horizon or Strategic Plan (Years 1-30)
• Tactical Horizon or Tactical Plan (Years 1-10)
• Operational Horizon or Operating Plan (Year 1)

Q.3 What is the advantage of having departments participate in the budgeting process?

Answer : Definition: Budgeting is the process of planning future business activities by establishing performance goals and putting them into a formal plan. In other words, budgeting is the process of making financial goals for a company and creating a plan to achieve those goals.

• Planning orientation. The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term. This is the chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget - at least it is thinking about the company's competitive and financial position and how to improve it.
• Profitability review. It is easy to lose sight of where a company is making most of its money, during the scramble of day-to-day management. A properly structured budget points out what aspects of the business produce money and which ones use it, which forces management to consider whether it should drop some parts of the business or expand in others.
• Assumptions review. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which management decides to operate the business.
• Performance evaluations. You can work with employees to set up their goals for a budgeting period, and possibly also tie bonuses or other incentives to how they perform. You can then create budget versus actual reports to give employees feedback regarding how they are progressing toward their goals. This approach is most common with financial goals, though operational goals (such as reducing the product rework rate) can also be added to the budget for performance appraisal purposes. This system of evaluation is called responsibility accounting.
• Funding planning. A properly structured budget should derive the amount of cash that will be spun off or which will be needed to support operations. This information is used by the treasurer to plan for the company's funding needs. • Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in.
• Bottleneck analysis. Nearly every company has a bottleneck somewhere, and the budgeting process can be used to concentrate on what can be done to either expand the capacity of that bottleneck or to shift work around it.

Q.4 Why do we begin the budgeting process with the Sales budget?

Answers :  Sales budget : is a financial plan, which shows how the resources should be allocated to achieve forecasted sales. The main purpose of sales budget is to plan for maximum utilization of resources and forecast sales.

objective : sales budgeting is to plan for and control expenditure of resources (money, material, facilities and people) necessary to achieve the desired sales objective.The purpose of sales budget is to achieve the objectives of the sales department. It also acts as a planning tool.

Although a sales budget is only an estimate of anticipated revenues, it is a vital means of projecting income based on factors such as economic conditions, competition, production resources and expenses. Creating a sales budget helps your company in a variety of ways.

1. Business Budgeting : The budgeting of different departments might be dependent on the Sales Budget. This is especially true in a production company where the production expenses are proportional to the amount of sales you hope to achieve. Without expected Sales Budget, the company doesn’t know how much to spend on Marketing, how much to spend on production and in any other department. While these are variable expenses, the fixed expenses like rent and utilities also have to be covered from sales budget.
2. Growth Goals : Another aspect of Sales Budget is that it sets targets for the Sales team and achieving those targets will help the company to grow economically and expand. The Sales team is motivated by giving incentives on hitting numbers and crossing them. The company can expect an overall growth in every department once Sales numbers are achieved.
3. Performance :Sales Budget is prescribed to the Sales team at the beginning of the year and the targets are distributed accordingly. At the end of the year, this budget can be used to know the performance of the sales team and, in turn, the performance of the organization. This depends on the forecasting done and also on the market conditions and competitor activities. But Sales Budget helps analyze the performance of every sales team member quantitatively.

Q.5 Managerial Accounting Course.

Answer : Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals.

Managerial accounting topics often include:

Job order costing.Process costing.
Absorption costing vs. variable costing.
Understanding cost behavior and cost-volume-profit analysis.
Operational budgeting.
Standard costing and variance analysis.
Activity based costing.
Pricing of individual products and services.

How difficult is managerial accounting?

It's hard because you (or anyone who feels that it is hard) just simply hasn't done it in real life before. Managerial accounting is as simple, standard and logical as breathing to anyone who has started and/or run any level of large scale business. ... Financial accounting is quite different.

Q.6 What is a capital expenditures budget and how is it developed?

Answer : A capital expenditure refers to the expenditure of funds for an asset that is expected to provide utility to a business for more than one reporting period.Examples of capital expenditures are as follows: Buildings (including subsequent costs that extend the useful life of a building) Computer equipment.

Following steps are follow to developed capital expenditure budget

(1) preparation and submission

(2) approval

(3) execution

(4) audit and evaluation.