Scribd
Upload
10 views7 pages

Understanding Budget Manuals and Committees

Uploaded by

stevinlouis123456
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
10 views7 pages

Understanding Budget Manuals and Committees

Uploaded by

stevinlouis123456
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

What is a Budget Manual?

A budget manual is a set of rules and instructions used by large organizations


to prepare their budgets and related reports. As organizations become larger
and more complex, it is no longer possible for just one person to prepare a
budget.

KEY TAKEAWAYS

 A budget manual is a set of standardized routines and instructions that


large organizations follow in budgeting and reporting.
 Large and complex organizations rely on such a manual to coordinate
budgeting activities across several actors.
 Budget manuals are developed and updated through a budget
committee that oversees standards and practices within the
organization's financial units.

What Is a Budget Committee?


The budget committee may also create and update the budget manual,
which is a complex set of guidelines and instructions used by large
organizations to prepare budgets.

KEY TAKEAWAYS

 A budget committee is a group within an organization that oversees the


allocation of financial resources for a company and allocates funds
accordingly to parts of the organization.
 The budget committee produces and updates an organization's budget
manual, providing clear rules and guidelines for the budgeting process.

 What Is a Budget Accountant?

 Budget accountant is the key role of the budgeting process. The


duties and responsibilities of the budget accountant are preparing
the budgets, monitoring the budgets against actual performance
and reporting on the variance. The role of the budget accountant
shows in the budget manual.

 Organisation used two main types of the


budgets

 Strategic budget (long term, not detail, responsibility of


the senior managers)
 Operational budget (Short term, detail, responsibility of
the middle managers)

 Approaches to budgeting
 Incremental budgeting (business organization)
- traditional approach, based on the previous period’s budget
Advantages – consistency, not conflict between department, easy to
understand and take less time.
Disadvantages – Leading to extra spending, different from actual, waste
of resources.

 Zero based budgeting (business organization) –


opposite incremental, based on zero, not look back period
budget,
Advantages – it forces re-evaluation of the activities, encourages
innovation
Disadvantages - avoids wastage and budgetary slack
 Priority based budgeting (non-business organization)
- Priority based budgeting is built on the idea that community
needs should determine how a budget is allocated, it can ignore
previous budget.

 Activity based budgeting


If production department has many indirect costs, manage with activity
based costing. Activity-based budgeting (ABB) is a system that records,
researches, and analyzes activities that lead to costs for a company.
Advantage- Activity-based budgeting helps businesses make
budgetary decisions based on specific cost drivers, their amounts
and their importance to company activities. An activity-based
budget integrates operations management and accounting in the
budget process.

Disadvantage- Activity-based budgeting requires a deep


understanding of various functional areas of the business.
Activity-based budgeting system is complex in nature. It requires
research and analysis of various factors.

*What is a balanced scorecard (BSC)*


A balanced scorecard is a strategy performance management tool
– a well-structured report, that can be used by managers to keep
track of the execution of activities by the staff within their control
and to monitor the consequences arising from these actions.[1]

*The Four Perspectives of The Balanced Scorecard*


There are four perspectives of the balanced scorecard which have
been emphasized below

 Financial: encourages the identification of a few relevant


high-level financial measures. In particular, designers
were encouraged to choose measures that helped inform
the answer to the question "How do we look to
shareholders?" Examples: cash flow, sales growth,
operating income, return on equity.[40]
 Customer: encourages the identification of measures that
answer the question "What is important to our customers
and stakeholders?" Examples: percent of sales from new
products, on time delivery, share of important customers’
purchases, ranking by important customers.
 Internal business processes: encourages the
identification of measures that answer the question "What
must we excel at? Examples: cycle time, unit cost, yield,
new product introductions.
 Learning and growth: encourages the identification of
measures that answer the question "How can we continue
to improve, create value and innovate?". Examples: time
to develop new generation of products, life cycle to
product maturity, time to market versus competition.

*Value engineering*
Value engineering is a systematic analysis of the functions of various
components and materials to lower the cost of goods, products and
services with a tolerable loss of performance or functionality. Value,
as defined, is the ratio of function to cost.
*Value analysis*
Value analysis is the process conducted for existing products with the
goal of improvement at the forefront. It is a step-by-step process that
evaluates all possible segments of a product to make them leaner.
Another aspect of value analysis is function analysis, where the
product is broken down into individual components which are all
analyzed separately.

*Data analysis*

Top-down budgeting
Top-down budgeting is a type of budgeting process in which
higher managers decide on a budget based on company goals. In
this process, budgeting decisions are made at the top and pushed
down to different levels of the corporate ladder.

Advantage- In a top-down budgeting structure, setting a budget is


simple and quick. Top-down budgeting saves companies a
considerable amount of time. Decisions are made quickly and
lower management doesn’t have to worry about making tough
budgeting decisions.
Disadvantage- Top-down budgeting may be inaccurate and
unrealistic because it doesn’t look at granular spending.

Bottom-up budgeting
Bottom-up budgeting is the opposite of top-down budgeting. It’s a
budgetary process in which lower managers and team leaders
decide their budgets based on their objectives. For it to succeed,
bottom-up budgeting must be a company-wide effort.

Advantage- Bottom-up budgeting is a company-wide effort that


can take considerable time. Bottom-up budgeting gives many
people across an organization a voice. It’s an excellent way to
boost employee involvement and promote company culture. It’s
also the most accurate way to predict future spending, making it
highly accurate.

Disadvantage- This budgeting structure is time-consuming and


makes lower management’s job more difficult.

Benefit of the Technology


 The use of technologies can help a business speed up
many processes. If technology is used to replace tasks
which were time-consuming, this allows managers to
focus on other areas or important areas. The effective of
the technology can improve overall efficiencies in the
business. Improving technologies which have been
implemented which will enable the information required
to calculate cost drivers to be obtained more effectively.

Common questions

Powered by AI

Implementing activity-based budgeting (ABB) can be challenging due to its complexity and the detailed understanding required of various business functions. This complexity can lead to difficulties in accurately researching and analyzing cost drivers, potentially reducing the effectiveness of ABB if managers lack the necessary expertise or resources to conduct thorough assessments. Mismanagement of these challenges could negate ABB's benefits of aligning costs more closely with company activities .

Top-down budgeting is quick as decisions are made by upper management, but it may lack accuracy because it doesn't consider detailed insights from lower levels. Bottom-up budgeting fosters employee involvement and improves accuracy by incorporating input from various organizational levels; however, it is time-consuming and requires extensive coordination .

Incremental budgeting is based on previous periods' budgets, offering consistency and ease of understanding but may lead to unnecessary spending and resource wastage. Zero-based budgeting starts from zero and requires justification for all expenses, promoting innovation and eliminating waste. However, it is more time-consuming and complex, as it requires a thorough re-evaluation of all activities .

Value engineering systematically analyzes functions to reduce costs while maintaining performance, typically focused on new products. Conversely, value analysis applies to existing products, aiming to improve them by analyzing components separately for streamlining. While both aim to enhance value, value engineering is proactive in product design while value analysis is reactive to existing product inefficiencies .

A budget manual in large organizations serves as a set of rules and standardized routines used in budgeting and reporting. It benefits the budgeting process by coordinating activities across various actors, ensuring consistency, and providing clear guidelines that simplify the preparation of budgets. This allows for efficient resource allocation and management, often overseen by a budget committee that ensures these standards are up-to-date .

Technology can significantly improve budgeting efficiency by automating time-consuming tasks, which in turn frees managers to focus on strategic decision-making. It enhances data processing capabilities, enabling more accurate and real-time analysis of cost drivers. This technological enhancement streamlines operations and supports more informed budgeting decisions .

A balanced scorecard enhances strategic performance management by providing a structured report that tracks execution of activities across four perspectives: financial, customer, internal business processes, and learning and growth. This approach ensures a comprehensive assessment of organizational performance, encouraging managers to focus on strategic objectives and align operational actions with long-term goals .

An organization may select strategic budgeting to focus on long-term goals and ensure alignment with its overarching mission, involving broad fund allocations managed by senior managers. Operational budgeting, in contrast, is more detailed and managed by middle managers, focusing on short-term needs and specifics. This delineation ensures that strategic intent guides day-to-day operations through clear hierarchical responsibilities .

The budget accountant is primarily responsible for preparing budgets, monitoring them against actual performance, and reporting variances. In contrast, the budget committee oversees the allocation of financial resources throughout the organization and helps produce and update the budget manual. While the budget accountant focuses on implementation and monitoring, the committee provides overarching guidelines and policies .

Failing to regularly update a budget manual can lead to outdated practices, inconsistency in budgeting processes, and misalignment with current organizational goals. This oversight could result in inefficient resource allocation, miscommunication across departments, and potential financial inaccuracies, ultimately affecting the organization’s strategic execution and financial health .

You might also like