Budgeting for Planning and Control
This chapter introduces budgeting for planning and control, defining a budget as a plan showing a company’s objectives and how management intends to acquire and use resources to reach them. It covers the master and responsibility budgets, the human factors that make budgeting effective, and building an operating budget from a sales forecast.
What a budget is for
A budget formalizes management’s plans in quantitative terms, forcing all levels of management to think ahead, anticipate results, and take corrective action before problems occur. Several kinds of budgets serve different purposes, including the master budget, responsibility budgets tied to individual managers, the capital budget for longer-term asset spending, and the planned operating and financial budgets that together project a company’s income statement and balance sheet.
Making budgeting work
A budget succeeds only when top management visibly supports it and when the employees who must live within it participate in setting its goals, since people are more likely to strive toward targets they helped set. Results must be communicated promptly and clearly so employees can adjust their performance, the budget itself must stay flexible enough to be restated if the assumptions behind it change, and managers must follow up continuously rather than treating the budget as fixed once approved.
Building the operating budget
Managers typically begin a planned operating budget in units rather than dollars, forecasting sales units for the year and then, based on that sales forecast and the company’s inventory policy, the units that must be produced. Dollar figures are introduced afterward: expected selling prices and costs are analyzed, a schedule forecasts cost of goods sold, and a separate budget covers selling and administrative expenses, supported by further schedules as needed.