What you will learn to do: Identify objectives, procedures, and limitations of budgeting

Budgeting involves the coordination of financial and nonfinancial planning to satisfy organizational goals and objectives. No foolproof method exists for preparing an effective budget. However, budget makers should carefully consider the conditions that follow:

Top management support

All management levels must be aware of the budget’s importance to the company and must know that the budget has top management’s support. Top management, then, must clearly state long-range goals and broad objectives. These goals and objectives must be communicated throughout the organization. Long-range goals include the expected quality of products or services, growth rates in sales and earnings, and percentage-of-market targets. Overemphasis on the mechanics of the budgeting process should be avoided.

Participation

Management uses budgets to show how it intends to acquire and use resources to achieve the company’s long-range goals. Employees are more likely to strive toward organizational goals if they participate in setting them and in preparing budgets. Often, employees have significant information that could help in preparing a meaningful budget and may be motivated to perform their own functions within budget constraints if they are committed to achieving organizational goals.

Communicating results

People should be promptly and clearly informed of their progress. Effective communication implies (1) timeliness, (2) reasonable accuracy, and (3) improved understanding. Managers should effectively communicate results so employees can make any necessary adjustments in their performance.

Flexibility

If significant basic assumptions underlying the budget change during the year, the planned operating budget should be restated. For control purposes, after the actual level of operations is known, the actual revenues and expenses can be compared to expected performance at that level of operations.

Follow-up

Budget follow-up and data feedback are part of the control aspect of budgetary control. Since the budgets are dealing with projections and estimates for future operating results and financial positions, managers must continuously check their budgets and correct them if necessary. Often management uses performance reports as a follow-up tool to compare actual results with budgeted results.

Here is a quick overview of the business budgeting process:

You can view the transcript for “Introduction to Budgeting (Managerial Accounting)” here (opens in new window).

When you are done with this section, you will be able to:

• Understand objectives of budgeting
• Identify types of operating budgets
• Recognize limitations of both static and flexible budgets

Learning Activities

The learning activities for this section include the following:

• Reading: Objectives of Budgeting
• Self Check: Objectives of Budgeting
• Reading: Types of Budgets
• Self Check: Types of Budgets
• Reading: Budget Limitations
• Self Check: Budget Limitations