Accounting - Budget

Since I am doing my revision for upcoming exam, might as well make this post useful for my revision.

Reasons for budget (also imply benefits)

1. Planning (for direction towards goal and achievement) - constant and best to reoccur.

2. Control (forecast early risk or warning) - to find early solution, investigate and improve

3. Coordinate (alignment towards direction) - to form consensus for people and value management especially in manufacturing vs sales

4. Participation (empowerment, contribution) - form of responsibility and motivation for managers

5. Goal Congruence (evaluation) - quality of budget. expectation vs reality

Approaches to budget

1. Incremental Budget

Uses previous year budget as basis. Usually increases budget based on expectation of performance for coming period. Eg, expect 10% increase ... budget y1 = 1000, ys =1100

pro - simple to use and understand, avoid confusion between departments, small change and very flexible mechanics

con - "use or lose system", no incentive, no accountability for change (assume variables are not changing)

2. Zero based-budget

Budgets begin at 0. Allocation are based on merit or goals. Cost Benefit basis

pro - avoid wastage, inefficiency and redundancy. Utilize cost effective methods. Control mentality of departmental demands

con - difficult to prepare, longer time and resources needed, not suitable for large organization - too many varies, ST rather than LT (cos more money focus on benefits), eliminate of expenses may not be wise (eg cost centre concept)

3. Activity based-budget

Activity or action basis, not cost. Assign cost to activity or product level based on each value of activity creates

pro - deep understanding on process and organization, profit vs single activity (ABC methodology), eliminate wastage or minimize risk

con - very complicated - requires software assistance, requires training for analyst, time and resource constrain may impact "real job" of budgets and sharing of cost issue (multiple cost drivers)

4. Rolling budget

A budget that is constantly amended due to changing circumstances.

pro - prevention of uncontrollable circumstances, flexible management and decision making, reduce uncertainty and extension easily continued

con - time consuming and may lead to wastage in resource planning, may roll into bigger problems

5. Other budget - topdown, bottom up, bid and review, participatory

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Now, I need to understand and remember them. Hopefully when I pop open this post on Friday, I can recall at least 80% what I wrote.

Ok, time to go home and eat ...