The purpose of budgeting system is the set of procedures used to serve the needs of management functions of planning and control that refers to the importance of communication and motivation as an aspect of management to which management accounting should contribute or develop. Budgeting systems have five (5) primary purposes which include; planning, facilitating communication and coordination, allocating resources, controlling profit and operations and evaluating performance and providing incentives. However, planning and control are the major activities in most organisations and budgets are at the centre of these activities. The terms planning and control are used to suggest that they mean the same thing, but they are two different concepts. Planning involves on individuals who make up an organisation to plan ahead in other to achieve those objectives, whereas control involves in establishing budgets for different departments giving responsibilities to individual managers in the increase that the objectives set down at the planning stage are all working toward that goal through the parts of organisation. Thus, budgeting is crucial part of planning and control because they both plan for the future. A company performance determines by budgeting as a management tool to support motivation, planning, communications and decision making. Budget is a detailed level plan which sets out, in money terms, where companies plan and maintain budget on either an accrual or cash basis. A budget is also refers to as a financial terms or quantitative terms used to project future income and expenses such as labour hours, material purchases, or units of sales. Budgeting helps organisations implement specific strategies to meet goals and objectives. Budgets are of course internal to the organisation and like most management accounting information, does not form part of the organisation's published financial statement. Hence, not everyone is responsible for preparing budgets, but everyone within an organisation will be affected by them. (Hugh Coombs, et.al, 2005, pg91).
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Many senior management responsibilities are to impose different budgets on different departments. Hence, if the preparation of the budgets involves the employees in the organisation at a lower level then budgets is more likely to be accepted. These will make people work as a team resulting in increased motivation. Employees will be more motivated with increase participation and encouragement as this could also be more beneficial to have a reward system such as increase on salaries, promotions etc. All this will have a big impact to the company and enables the company grow hence, if employees don't get what they requested then, employees may ignore the system having little importance to the business and this could affect the objectives of the company. In order to have a successful budgeting, a good communication should be effectively in order to meet targets and objectives.
Different types of budgets serve different purpose. The type of budget includes master, capital, operating (for income statement items comprised of revenue and expenses), financial (for balance sheet items), sales, capital, production and project. These budgets are briefly explained below.
Master Budget is the principal output of a budgeting system. It is usually prepared annually or quarterly. The master budget has three (3) components: the budgeted profit and loss account for the year, the budgeted cash flow statement and the budgeted balance sheet.
Operating and Financial Budgets the operating budget deals with how operations are carried out to produce an organisation's goods or services. The financial budget emphasis on how an organisation will acquire financial resources during the budget period.
Sales Budget is used to create company sales goals that show the projected sales in units and the projected sales revenue.
Capital Budget shows a prediction of company needs in regard to capital assets, such as land, equipment, vehicles, buildings, and machinery. The capital budget helps the company plan for acquisition and disposal of assets that include the use of available cash or outside financing.
Production Budget indicates the number of units of services or goods that must be produced each budgeted period to meet sales needs and to provide for the desired ending inventory.
Project Budget shows the prediction of the costs associated with a particular company project such as labour, materials and other related expenses.
The preparation of budgets forces managers to think about and plan for the future, which assumes to be the most important feature of a budgetary planning and control system. This planning process encourages staffs from a organisation to contribute on regular basis to the formation of the overall plan and to identify potential difficulties at an early stage. People's personal budget allows them to know how much money they have to send, how their funds are allocated to plan for the future. A budget is tool use to provide a means of communicating management's plans that ensure all parts of the organisation are kept fully informed of the plans and of the policies. For example, if a family are going through a difficulty with their budget, a good communication will be a good tool to give a better understanding of their budget. Furthermore, benefits of budget allow you to take the opportunity to know your exact financial position that keeps the lines of communication open.
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Budgeting is one of the most important management concepts in modern business organisation. According to Dawn (2003), about 69% companies in Europe still operate their day to day activities with formalised traditional budgeting systems. This has develop the future an organisation and its environment, coordinating activities and tasks, promoting communication between departments and motivating employees (Webber & Linder, 2005) <http://www.jcuedu.au/tldinfo/writingsskills/models/papers/ CO5103essay1.pdf>. Budgeting consumes too much time and costly to small businesses. For example, it could take 60 days for a big company to plan their budget.