University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

31

Pages:

2
Author:

Danny A.

Advantages Of Budgeting The preparation of a budget is an important aspect of a company's suc-cess. The preparation of a budget is advantageous because it: 1. Helps management to establish short-term and long-term goals for the company. 2. Motivates employees to achieve company goals. 3. Assists in motivating employees to work together in a coordinated effort. 4. Provides for a systematic review of performance. The Budget Period Budgeting may cover many different time periods. Most companies establish shortterm cash budgets of a week or a month to ensure that they have enough cash on hand to meet current needs. On the other hand, budgets for the acquisition of property, plant, and equipment, termed capital budgets, have a much longer time horizon. Operations budgets, which forecast revenues and expenses, are usually for a year and are aligned with the company's accounting period so that comparisons with actual results can be easily accomplished. Operations budgets are also frequently divided into quarterly and monthly budgets. This approach allows for continuous review and comparisons with actual results and for reappraisals of the original budget data. Human Factors in Budgeting The success of the budgeting process depends on the cooperation of all employees. However, the method of preparing the budget can impact on the amount of cooperation contributed by the employees. Many organizations impose budgets prepared by top management. This process emphasizes the use of budgetary control; consequently, the employees may not believe that the methods used in evaluating their performance have been equitably developed. Alternatively, the budget may be used as a positive rather than a negative instrument; misgivings of the employees can be overcome by allowing them to participate in the budgeting process. Participation permits the managers who are responsible for departmental goals to have a voice in setting their own goals and objectives. This approach, termed participatory budgeting, has several advantages: 1. It improves the budget estimation process because the individuals closest to activities tend to be in the best position to make budget estimates. 2. It assists in communicating to all employees that they are members of a team working together to achieve common goals. 3. It motivates employees to achieve the goals they have helped to establish. On the other hand, participatory budgeting may create some additional problems as discussed in the practical insight. Components of The Master Budget As indicated earlier in the chapter, the master budget is a comprehensive set of interrelated budgets that summarizes a company's goals for the coming period. The master budget generally comprises the following separate budgets: 1. Sales budget. 2. Schedule of cash collections. 3. Production budget. 4. Raw material purchases budget. 5. Cash disbursements for purchases budget. 6. Direct labor budget. 7. Factory overhead budget. 8. Selling and administrative expenses budget. 9. Capital expenditures budget. 10. Cash budget. 11. Budgeted income statement. 12. Budgeted balance sheet. 13. Budgeted statement of cash flows.