Chapter 21 - Budgeting
Learning Objective
Objective 1:
Describe budgeting, its objectives, and its impact on human behavior
Answer:
Budgets play an important role in organizations of all sizes and forms. Budgeting involves
establishing specific goals, executing plans to achieve the goals, and periodically comparing
actual results with the goals. In doing so, budgeting affects the planning, directing and
controlling managerial functions.
Planning→ Directing → Controlling → Feedback
Planning involves setting goals to guide decision and help motivate employees. The
planning process often identifies where operations can be improved
Directing involves decisions and actions to achieve budgeted goals. A budgetary unit of a
company is called a responsibility center.
Controlling involves comparing actual performance against the budgeted goals. Such
comparisons provide feedback to managers and employees about their performance.
Human behavior problems can arise in budgeting prices.
● Budgets are set too tight (Too hard to reach)
○ Managers and employees may become discouraged if budgeted goals are set
too high. If budgeted goals are viewed as unrealistic or unachievable, the
budget may have a negative effect on the ability of the company to achieve its
goals.
● Budgets are set too loose (Too easy to reach)
○ Although it is desirable to establish attainable goals, it is undesirable to plan
budget goals that are too easy. Such budgets are termed budgetary slack.
Slack budgets create inefficiency by reducing the budgetary incentive to trim
spending.
● Budgets conflict with the objective of the company and employees
○ Goal conflict occurs when the employees’ or managers’ self-interested differs
from the company’s objectives or goals.
Objective 2:
Describe the basic elements of the budget process, the two major types of budgeting, and
the use of computers in budgeting
Answer:
Budgeting systems vary among companies and industries, but the basic budgeting concepts
apply to all types of business and organizations. The budgeting period for operating activities
normally includes the fiscal year of a company. However, for control purposes, annual
budgets are usually subdivided into shorter time periods, such as quarters of the year,
months, or weeks. A variation of fiscal-year budgeting is called continuous budgeting, this
maintains a 12-month projection into the future at all times. Meaning they always add on
month and delete the past month at the end of the months. There are several methods of
developing budget estimates. One method is the zero-based budgeting, this requires
managers to estimate sales, production, and other operating data as though operations are
being started for the first time. This approach has the benefit of taking a fresh view of
operations each year. Two major budgets using this approach are the static budget and the
flexible budget.
, A static budget shows the expected results of a responsibility center for only one activity
level. Once the budget has been determined, it is not changed, even if the activity changes.
A disadvantage of static budgets is that they do not adjust for changes in activity levels.
Flexible budgets show the expected results of a responsibility center for several activity
levels. A flexible budget is a series of static budgets for different levels of activity. The
flexible budget allows comparison in the actual costs and the budgeted actual costs by the
activity level and then adding the monthly fixed costs. The flexible budget is much more
accurate and useful than the static budget. This is because the flexible budget adjusts for
changes in the level of activity. Flexible budgets can be used in service businesses when the
variable costs can be associated with an activity.
In developing budgets, companies use a variety of computerized approaches, two of the
most popular are:
● Spreadsheet software such as Microsoft Excel
● Integrated budget and planning (B&P) software systems
Spreadsheets ease budget preparation by summarizing budget information in linked
spreadsheets across the organization. B&P software systems use the Web (intranet) to link
thousands of employees together during the budgeting process. This way a company can
quickly and consistently integrate top-level strategies and goals to lower-level operational
goals.
Objective 3:
Describe the master budget for a manufacturing company.
Answer:
The master budget is an integrated set of operating and financial budgets for a period of
time. Most companies prepare a master budget on a yearly basis.
Learning Objective
Objective 1:
Describe budgeting, its objectives, and its impact on human behavior
Answer:
Budgets play an important role in organizations of all sizes and forms. Budgeting involves
establishing specific goals, executing plans to achieve the goals, and periodically comparing
actual results with the goals. In doing so, budgeting affects the planning, directing and
controlling managerial functions.
Planning→ Directing → Controlling → Feedback
Planning involves setting goals to guide decision and help motivate employees. The
planning process often identifies where operations can be improved
Directing involves decisions and actions to achieve budgeted goals. A budgetary unit of a
company is called a responsibility center.
Controlling involves comparing actual performance against the budgeted goals. Such
comparisons provide feedback to managers and employees about their performance.
Human behavior problems can arise in budgeting prices.
● Budgets are set too tight (Too hard to reach)
○ Managers and employees may become discouraged if budgeted goals are set
too high. If budgeted goals are viewed as unrealistic or unachievable, the
budget may have a negative effect on the ability of the company to achieve its
goals.
● Budgets are set too loose (Too easy to reach)
○ Although it is desirable to establish attainable goals, it is undesirable to plan
budget goals that are too easy. Such budgets are termed budgetary slack.
Slack budgets create inefficiency by reducing the budgetary incentive to trim
spending.
● Budgets conflict with the objective of the company and employees
○ Goal conflict occurs when the employees’ or managers’ self-interested differs
from the company’s objectives or goals.
Objective 2:
Describe the basic elements of the budget process, the two major types of budgeting, and
the use of computers in budgeting
Answer:
Budgeting systems vary among companies and industries, but the basic budgeting concepts
apply to all types of business and organizations. The budgeting period for operating activities
normally includes the fiscal year of a company. However, for control purposes, annual
budgets are usually subdivided into shorter time periods, such as quarters of the year,
months, or weeks. A variation of fiscal-year budgeting is called continuous budgeting, this
maintains a 12-month projection into the future at all times. Meaning they always add on
month and delete the past month at the end of the months. There are several methods of
developing budget estimates. One method is the zero-based budgeting, this requires
managers to estimate sales, production, and other operating data as though operations are
being started for the first time. This approach has the benefit of taking a fresh view of
operations each year. Two major budgets using this approach are the static budget and the
flexible budget.
, A static budget shows the expected results of a responsibility center for only one activity
level. Once the budget has been determined, it is not changed, even if the activity changes.
A disadvantage of static budgets is that they do not adjust for changes in activity levels.
Flexible budgets show the expected results of a responsibility center for several activity
levels. A flexible budget is a series of static budgets for different levels of activity. The
flexible budget allows comparison in the actual costs and the budgeted actual costs by the
activity level and then adding the monthly fixed costs. The flexible budget is much more
accurate and useful than the static budget. This is because the flexible budget adjusts for
changes in the level of activity. Flexible budgets can be used in service businesses when the
variable costs can be associated with an activity.
In developing budgets, companies use a variety of computerized approaches, two of the
most popular are:
● Spreadsheet software such as Microsoft Excel
● Integrated budget and planning (B&P) software systems
Spreadsheets ease budget preparation by summarizing budget information in linked
spreadsheets across the organization. B&P software systems use the Web (intranet) to link
thousands of employees together during the budgeting process. This way a company can
quickly and consistently integrate top-level strategies and goals to lower-level operational
goals.
Objective 3:
Describe the master budget for a manufacturing company.
Answer:
The master budget is an integrated set of operating and financial budgets for a period of
time. Most companies prepare a master budget on a yearly basis.
