1.) Understand why organizations budget and the process they used to create budgets.
Budget: A detailed quantitative plan for acquiring and using financial and other resources over a
specified forthcoming time period; a plan for the future that is usually expressed in formal
quantitative plan.
+ Budgeting: The act of PREPARING a budget
+ Budgetary control: The use of budgets to CONTROL an organization’s activities.
_Budget period_
(1) Operating budget - It ordinarily cover a one-year period corresponding to a company’s fiscal year.
Many companies divide their annual budget into our quarters.
(2) Continuous Budget/ Perpetual budget – A 12-month budget that rolls forward one month (or
quarter) as the current month (or quarter) is completed.
_Two purposes of Budget_
(1) Planning: Developing goals and preparing various budgets to achieve those goal/objectives.
(2) Control: Gathering feedback to ensure(must) that the plan is being properly executed(perform) or
modified(changed) as circumstances(environment) changes.
> Why do organization create budget?
(Planning Perspective)
- Define goals and objectives
- Think about and plan for the future
- Communicate financial goal
- Means of allocating resources
- Coordinate the plan and activities
- Uncover potential bottlenecks
(Control Perspective)
From a control standpoint, organizations COMPARE their BUDGETS to ACTUAL RESULTS to:
- “Improve” the efficiency and effectiveness of operations.
- “Evaluate” and “Reward” employees.
>How do organizations create budget?
- Companies usually create budgets by relying on some combination of ‘top-down budgeting’ and
‘self-imposed budgeting’.
Top-down budgeting
Top-level managers initiate(책정하다) the budgeting process by issuing profit target; Lower-
level managers are directed to prepare budgets that meet those target.
Self-imposed budgeting
A self-imposed budget or participative budget is a budget that is prepared with the full
cooperation(협조,협력) and participation of managers at all levels.
1) Lower-level managers may make suboptimal budgeting estimates if they lack the broad
strategic perspective possessed by top managers.
2) If the budget is used to reward employees, then lower-level managers may create too
much ‘budgetary slack(예산 여유)’ in an effort to ensure that their actual results exceed
the plan.
, Chapter 8) Master Budgeting
Supervisor When managers throughout the organization work
Middle Man- collaboratively to prepare a budget they often strive to
agement establish challenging targets that are also highly achievable.
Supervisor
Top Man- These goals are likely to build a lower-level manager’s
agement confidence and commitment to the budget.
Supervisor
Middle Man-
agement
Supervisor
Advantages of self-imposed budgets
1. It show ‘respect’ for their opinions when lower-level managers are involved in the budgeting
process.
2. Budget estimate prepared by front-line managers are often ‘more accurate’ than estimates
prepared by top managers.
3. ‘Motivation is generally higher’ when individuals participate in setting their own goals than
when the goals are imposed from above.
4. ‘It empowers them to take ownership’ of the budget and to be accountable for deviations
from it.
Self-Imposed Budgets- Management Review
Self-Imposed budgets should be reviewed by higher levels of management to prevent ‘budgetary
slack’
Most companies issue broad guidelines in terms of overall profits or sales. Lower-level managers
are directed to prepare budgets that meet those targets.
>Master Budget(종합예산): a type of integrated business plan
A number of separate but interdependent(상호의존적인;서로 의존하는) budgets that formally lay out the
company’s sale, production, and financial goals.
All other parts of the of the mater budget depends on the sales budget.
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