You might recall that one of the first concepts we discussed in this video series
was the three primary functions of management.
They are planning, directing, and controlling.
Planning involves setting goals and objectives as well as how to achieve them.
Managerial accounting aids in this function through budgeting and forecasting.
A budget is a financial plan that managers use to coordinate business's activities. Management can then estimated future costs and revenues.
Management uses budgets to express its plan and to assess how well it's reaching its goals.
So the budgeting process is perhaps the most widely used management accounting tool employed by companies.
Budgeting assists in planning, acting, controlling and developing strategy.
Company strategies lead to detailed plans which in turn lead to actions.
Results are then compared to budget to provide managers feedback.
This is the part of the controlling function of management.
This feedback allows managers to take corrective action and, if necessary, revise strategies which starts the cycle over.
Tthere are a number of different concepts about how to prepare budgets.
The Top-down approach is when senior management develop high level targets
for major reportable items like sales revenue, operating income, and net income.
Then lower level managers have to create the details that add up to the target amounts.
While once commonplace, this method isn't as popular as it once was. There are drawbacks because sometimes senior managements'
targets are unattainable and lower level managers and employees are less motivated by goals they don't participate in developing.
Bottom-up budgeting, which is sometimes known as participative budgeting.
This process involves many different levels of management and benefits from lower level
managers being closer to the action and buying in on goals they help develop.
But there are some drawbacks to this method as well.
Budgeting is already a major undertaking within and management accounting department, usually taking two or three months to complete an annual
budget, and adding more groups to the process tends to slow it down even more.
Furthermore, some managers may prepare their budgets
in a more conservative manner, which is known as budgetary slack.
Budgetary slack occurs when managers intentionally over-budget expenses or under-budget revenues.
Often this is done so they can more easily meet their goals and look good to senior managers
but the future is uncertain budget cuts could hurt a department that didn't build in slack.
Ultimately, budgetary slack often results in participatory budgeting being turned into top-down budgeting.
There are few other budgeting terms you'll wanna be familiar with. A rolling budget is a budget that
is continuously updated so the next 12 months of operations are always budgeted.
So a budget that runs from January to December becomes a budget that runs from February to January, once January actual results are known.
Zero-based budgeting begins with a budget of zero and managers must justify every dollar they put into the budget.
This budgeting approach is very time consuming and labor intensive so is usually only used when expenses start getting out of hand.
The most common starting point for a budget is the prior year's actual results.
There many benefits to budgeting. They include forcing managers to plan activities, coordinate and communicate actions to other departments,
and provide benchmarks for motivating employees and evaluating performances.
So when I talk about budgets, I'm referring to the master budgets. The master budgets for manufacturers are shown here.
They are the sales budget, production budget, direct materials, labor, and overhead budgets.
It also includes a cost of goods sold budget and operating expenses budget. These collectively are known as the operating budgets.
Then there's a capital expenditure budget, a cash budget, and the budgeted financial statements.
The remaining videos related to budgeting explain how to create and use these budgets.
A master budget for a merchandiser is shown here. You can see that the purchases budget replaces many of the manufacturing budgets.
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