Accounting - The idea of budgeting

Accounting - The idea of budgeting

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  • Created by: Joanna
  • Created on: 11-04-12 09:35

Budgets

A budget is a short-term business plan, mainly expressed in financial terms

Budgets are the short-term means of working towards the business's objectives

They are usually prepared for a one-year period with sub-periods of a month

There is usually a separate budget for each key area

The budgets for each area are summarised in master budgets (budgeted income statement and statement of financial position)

Budgets are plans rather than forecasts

Periodic budgets are usually agreed for a year and then allowed to run their course

Continual budgets are updated each month to replace the month just passed

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Use of budgets

Budgets promote forward thinking

They help co-ordinate the various aspects of the business

They motivate performance

They provide the basis of a system of control

They provide a system of authorisation

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Zero-base budgeting

Zero-base budgeting seeks to ensure that all spending is justified

It encourages a questioning approach but can be time-consuming

It is probably best used selectively

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Preparing budgets

No standard style - practicality and usefulness are the key issues

They are usually prepared in columnar form, with a column for each month (or similarly short period)

Each budget must link (co-ordinate) with others

Non-financial measures (such as units of output) can be used when budgeting

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Effective budgetary control

Good budget control requires establishing systems and routines to ensure such things as clear distinction between individual managers' areas of responsibility; prompt, frequent and relevant reporting; and senior management commitment

There are behavioural aspects of control relating to management style, participation in budget-setting and the failure to meet budget targets that should be taken into account by senior managers

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