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Budget and Process Involved in Preparing Budgets

University: University of Sunderland in London Faculty of Business and Law

  • Unit No: 6
  • Level: Post Graduate/University
  • Pages: 7 / Words 1778
  • Paper Type: Assignment
  • Course Code: ACCT2111
  • Downloads: 156
Question :

This assessment will cover following questions:

  • Understanding of the role and scope of management accounting theory.
  • Generate an in-depth understanding of basic budgeting.
  • Evaluate fundamental costing and techniques.
Answer :

INTRODUCTION

Management accounting is defined as the process related to providing the financial informations and resources to management for decision making. Management accounting is used by internal management team for improving the performance of company. Management accounting helps the organisation to plan for its future activities and goals. Management accounting includes various rules and concepts to be followed. With this information managers of organisation are able to make more accurate decisions. It involves preparation of budgets and various cost accounting reports for reducing the cost of production. The report is about the budget and the process involved in preparing a budgets. It will also provide for the budgets and the behavioural aspects of the budgeting process.

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MAIN BODY

Budgeting

Budget can be defined as quantitative and financial statements of the operational plans related to specific time period, that are required to be followed in the budgeted period for achieving the specific financial objective of organisation. Budget is formal statement related to estimated incomes and expenses which are based over future goals and objectives. Budget is prepared by the management for estimating the expenses and revenues for upcoming period on the basis of business goals (Budgeting, 2019). The budgets are prepared in advance before the process of activity has been started and again after the process or activity is completed actual cost statements are prepared.

Budgeting is a critical process for the business organisations. It involves various process like evaluating, monitoring, controlling and forecasting financial goals of business. Budgets are required to be framed after carrying out proper research about all the items that are to be included in the budgetary process. The budgets are prepared for the organisation to have control over its spendings and costs. Budget mainly serves as the great guide through which business could oversee their income stream and could determine the potential dangers towards it beforehand.

Budgets provide the organisation a defined direction to follow during the budgeted period. Budgets helps in proper allocation of resources among the activities and department. Budgets ensure that there is effective utilisation of resources within the activities (Morgan and et.al., 2017). If these budgets are not prepared appropriately they may affect the whole cost structure of company. Management prepares statements of variance analysis for comparing the actual outcomes with that of the budgeted.

Sequence of budgeting process

Every organisation is scarce of time and money. Effective and efficient utilisation of resources needs planning. Budget is prepared for planning and controlling the business expenditures. Various types are budgets can be prepared by the organisation for planning the future earnings and expenses. It involves projecting future profitability of the business and its maintenance (Reome and Sinclair, 2017). The budgets are prepared after going through number of processes. The steps involved in the budgeting process are :

Setting objectives for budgeting of company

Budgeting committees or key managerial personnels before the budgets are prepared for company must set goals and objectives for future of company. The objectives to be included can be cost savings, the defined limits of expenditures. The objectives should be made considering all the factors that will lead the organisation towards growth and profitability. It should not be limited over the expansion plan.

Determining the available resources

Business objectives may influence budgeting process of company but should not entirely dictate the process. Management are required to analyse the resources available and determine whether the sufficient resources are available for reaching the objectives of company (Becker and et.al., 2016). The availability of resources often dictate over a considerable extent objectives of company. Resources are not limited over cash available with company and also include loans or additional investment. The company should make available sufficient funds for carrying out the operations of company.

Projecting future needs

Budget is prepared in advance and it is looking forward. It involves making estimates for future. It is not possible for anyone to make accurate projections about the future budgetary requirements of organisation. Management prepares budgets after making thorough research about the future needs and demands by reviewing the previous budgets and estimates and the variances. Company should analyse the market trend, company data for past years, data available for competitors and the analysis about the existing & developing regulatory and economic trends. Future needs are required to be estimated properly making significant research as the sales projections will be making the structured budget. Too high high projection may lead to scarcity of funds in future.

Matching the future needs to the available resources

Most of the times available resources will not be enough for fitting perfectly with the projected needs of future. At this stage of budgeting cycle negotiations and compromises may be made between departments for determining the sufficient allocation of scarce resources of company (Guo and et.al., 2019). Management is required to keep in mind the strategic needs and priorities at this stage so that the resources are evenly allocated between the departments. It is an important task to ensure that the available funds are enough. Management is required to arrange for the necessary funds so that all the operations are carried out smoothly by company without any break down.

Reviewing the budget

Budgets after making all the adjustment are required to review the budgets. Management is required to review the budgets after completion. They have to ensure that all the adjustments have been properly made and all the requirements have been addressed. It is to be reviewed effectively as errors of even decimals can make signifiant impact over the budget and whole cost structure may be disturbed.

Aggregating the budgets

Once all the departments have completed their budgets. Management combines all the budgets for forming one master budget. The master budget contains the aggregate budget considering the revenues and expenditures of all the departments. This budget is sent for final approval of top executives.

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Obtaining Final Approval

After the budgets have been prepared carrying out all the research and future projections. Budget is required to get final approval of the budgeting or any other body in governance who makes final approval of the budget. The budgets are evaluated by the top executives that whether these are prepared in accordance with the guidelines issued by them (Wildavsky, 2018). The ensure that budgets has been prepared addressing needs of various stakeholders and and the objectives of company.

Distribution of Funds

Management after the budget is approved by executives and finalized, budgeting process includes distribution of the determined funds to various segments and departments of business. Distribution should be made as per the budgeted levels.

Implementation of budgets

Budgets are finally distributed and implemented among all the departments of organisation. After this all the departments are required to carry out their operation as per the budget. They cannot make any adjustments to the final budgets without the approval of management.

Monitoring & Evaluating

After the budgets are finalized and implemented budgeting process in no complete. Management are required to actively monitor and evaluate whether the operations are meeting the budgeted levels (Budgeting process, 2019). They should identify areas where budgets are lacking and take corrective steps on time.

Issues of relevance on behavioural aspects of budgeting process

Budgeting is a key part of managerial accounting, which focuses on using financial information for planning and decision-making. Some of the behavioural implications related to budget are being discussed below. The following behavioural aspects are of budgetin

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