Question

Why should each department participate in preparing its own budget? How much control do you think each department should have? Does your answer differ for when considering a service firm versus a manufacturing firm?

Please answer in 350 words or more. Please add examples

Answer 1

Budget is prepared for the organisation as a whole where every department is the cost center of the organisation hence each department should participate in the preparation of its own budget. Each such cost center has its drivers for example the total number of manpower required and estimated salary to be paid and how many positions are vacant are relevant factors for a service firm. What would be the tax cost, consultancy cost ,office adminstration cost, fixed asset procurement cost etc.

Every department will have hundred percent control in providing an estimate based on the projected requirement and anticipated expenditure and also should provide a estimate of the estimated revenue that would be generated as they are the best judge and owner of the process but in a corporate there are some departments for example accounts, tax cannot generate any revenue so thay can provide a budget of expense only unless therre is some deferred taxation or refund arises from any assessment year from Income Tax department. In every organisation certain budget is sanctioned and then proportionately dependiing on the estimation provided and amount sanctioned the departments have to divide the total budget amongst themselves respectively.

In case of manufacturing firm they are production units and responsible for generation of revenue and also involves various cost drivers to produce the goods. Number of units to be produced , number of man hours , fixed overhead, manufacturing overhead are some of the factors to prepare the budget. Here we calculate the total cost of producing one unit and then take a mark up of the estimated profit per unit and add it to the cost price and arrive at the sale price per unit. Hence revenue and cost budgets are simultaneously prepared.