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BUDGETS

 

Probably the oldest and the most widely accepted control technique is the budget. A budget is an itemized estimate of expected revenue (income) and expense, and thus it expresses the plans and objectives of the organization. There are budgets of time, space, and materials, but most budgets are expressed in financial terms. The most common type of budget is an operating budget, lasting expected receipts and expenses for the coming year, based on the experience of the past year and adjusted for expected changes. For a private company, the principal source of revenue is sales, but operating expenses may be listed in extensive detail, under headings such as labor, materials, heating, and travel. Plans for new capital expenditures call for special capital expenditure budgets. Still another kind of budgets is the cash budget, or cash flow analysis, to help management maintain a sufficient supply of cash to meet obligation without tying up funds that could be more profitably invested elsewhere.

A private enterprise with revenue chiefly from sales may not be able to predict its income with confidence and therefore may be unable to plan expenses reasonably. One answer on this problem is to set up two or more alternative budgets for different levels of income and then to use the one that agrees with actual income. If seasonal variation in revenues can be expected, then a similar variation in expenses can also be budgeted. But the most common solution to the need for variability is the flexible or variable budget. In this system, some operating expenses are considered to be mixed (varying slightly) – for example, personnel cost, since employees cannot be hired, trained and released several times a year. Then every month subordinate managers are informed of the latest estimates of output for that month, so that expenses can be adjusted accordingly.

When department heads estimate their budget needs for the coming year on the basis of the past year, there is always a danger that they will fail to reduce their estimate for needs that are no longer real. This problem has caused the development of zero-base budgeting, in which all costs are calculated from base zero, without regard to the previous year’s budget. This forces managers to explain and justify every item in their budgets and helps to eliminate unnecessary expenditures.

After budgets have been prepared for all the departments in an enterprise, they are all added together in what is called a budget summary. If the separate budgets have been calculated carefully and in accordance with objectives, the budget summary will give the top executives an excellent picture of overall sales, earning and return on capital. Thus, the budget summary is perhaps the most widely used device for overall control, in that it shows exactly what the organization’s objectives are and how they are to be realized.

 


Date: 2015-01-29; view: 906


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