Question

Operational Budgeting and Profit Planning.

1- Identify the advantages and the disadvantages of the incremental approach to budgeting.

2- Explain the continuous improvement concept of budgeting

3- Contrast the top-down and bottom-up approaches to budget preparation

4- Is budgetary sack a desirable feature?Ca it be prevented?Why or why not?

5- Why should motivational considerations be a part of the budget planning and utilization? List several ways to motivate employees with budgets.

Answer 1

-> Operational budgeting :- An operating budget is the annual budget of an activity stated in terms of Budget Classification Code, functional/subfunctional categories and cost accounts. It contains estimates of the total value of resources required for the performance of the operation including reimbursable work or services for others. It also includes estimates of workload in terms of total work units identified by cost accounts.

-> profit planning :- Profit planning is the set of actions taken to achieve a targeted profit level. These actions involve the development of an interlocking set of budgets that roll up into a master budget. The management team adjusts the information in this set of budgets to arrive at the combination of actions needed to arrive at the targeted profit level. The planning process may involve a significant amount of what-if analysis, to see what happens to projected profits in different scenarios.

(1)->> Incremental budgeting is an important part of management accounting based on the premise of making a small change to the existing budget for arriving at the new budget. Only incremental amounts are added to arrive at the new budgeted numbers.

ADVANTAGES:-- • This method of budgeting is very easy to implement and does not entail any complex calculations. This can be achieved for various departments without much issue as one does not need any detailed analysis irrespective of the department in consideration.

• Incremental budgeting ensures continuity of funding for the departments without much detailed analysis of funding requirement.

• The impact of the change can be seen immediately in case of incremental budgeting.

DISADVANTAGES:-- •This approach may tend to make managers spend more as budgets may be easily available and may lead to unnecessary spending of funds which may not be warranted.

• Incremental budgeting subconsciously encourages higher spending so that the budget is maintained next year.

• Incremental budgeting may cause management to lead into a scenario called as budgetary slack, whereby managers tend to build lower revenue growth and higher expense growth so as to have favorable variances.

(2)-->> The baseline in a continuous improvement incentive program is last year’s performance: Generating more is better and less is worse. To embrace absolute performance and let go of performance against budgets, however, you need a comprehensive metric.

(3)-->> Whether you are creating a budget for your home, small business, or large corporation, there are two major approaches: the top-down approach and the bottom-up approach.

• Top-down budgeting:-In corporate budgeting, a top-down approach involves the senior management team developing a high-level budget for the entire organization. Once these budgets are created, amounts are allocated to individual departments, and those departments must then take those numbers and build their own corresponding budgets within the confines of the executive-level-created budget.

• Bottom-up budgeting :-- With a bottom-up approach, the process starts in the individual departments where managers create a budget and then send it upwards for approval. That budget is either approved, revised or sent back for modifications, and a master budget is created from the various departmental creations.

(4)-->> A budget is a financial document or an action plan which is prepared and used to project future income and expenses. It outlines an organisation’s financial and operational goals. It can also include non- monetary information with the monetary information. They need to be made and approved in advance of the year in which they are to be used or implemented.

Features :--It is expressed in quantitative or monetary terms.

- It is prepared for a fixed period of time It is prepared before the period in which it commences.

- Practical to implement.

- It spells out the objects and the policies to be pursued in order to achieve the objective of the organisation.

- Many people are involved in drawing up a budget.

- Flexible enough to allow changes in the changing environment.

- Prepared on the basis of established standards of performance.

- Analysis of cost and revenues.

(5)-->> Budgets can be used to motivate your staff to be more fiscally minded, to pay greater attention to detail and to think before they act. Successfully using the budget as a motivational tool requires involving employees in the formation, use and monitoring of budget results. Consistency is critical, however: If the budget isn't your focus, it won't be the focus of your employees either. This can lead to de-motivation or other problems.

Formation

1. Include employees in the drafting of the budget. Employees who have a stake in the budget are more likely to adhere to its goals and objectives.

2. Obtain agreement from all parties to the budget before it is completed. By explicitly seeking agreement from upper management, supervisors and employees, you make sure everyone is held equally accountable for the successes and failures of the budget.

3. Make the completed budget available to all stakeholders. Sending a copy of the final budget to everyone involved jogs the memory of everyone who created the document and ensures they have a chance to review what they have created.