There is no doubt that a company is necessary to prepare plans for future periods, such as planning, budgeting, control, which these preparations not only help to develop and operate the company, but also they may be able to decrease mistakes when managers have a decision-making so that to reduce risks. For instance, some companies may depend on their firms' current situations and global economy situations to make specific plans such as investing new projects or investments in the future in order to maximize profits. Therefore, in this essay, firstly, it will be illustrated the terms of "planning", "control", "budgeting", and the relationship between them. Secondly, it will be described how the organization prepares the annual master budget. Finally, a discussion of the potential possible problems that may come from the budgeting process and the effect of budgetary information will be made.
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In general, it is known that planning is very important for the development of organizations. Basically, planning means company could prepare long-term and short-term marketing plans and it will make some objectives, decide appropriate strategies and take some actions to accomplish their goals. Long-term planning in company usually covers 5 years. According to Drury (2008, p.352), establishing objectives is the first stage of the long-term planning process, followed by identifing potential courses of action (i.e. strategies), the organization need to undertake a strategic analysis to have a better understanding of its present strategic situation, such as the organization's present position, its strength and weakness. The third stage is to evaluate alternative strategic options, in this stage, the alternative strategies should be examined with three criteria, including suitability, feasibility and acceptability. The fourth stage is to select alternative courses of actions.
However, short-term planning covers the next twelve months. In terms of short-term plan in organization, some companies will in order to assist their company in moving gradually toward its long-term goals, so that they set up some short-term plans. Therefore, it seems that company is necessary to set up short-term goals which as steps to achieve the long-term objectives.
For another thing, in relation to budgeting it is obvious that to control is important for company to manage and achieve the targets. It is stated by Drury (2008, p.356) that through comparing the actual results with the budgeted amounts, the company can find out the differences so that the managers could pay more attention on the original targets and actual outcomes. Good control could help the company to solve the emergency situations. Taking BMW as an example, BMW Group make use of the functionality in order to manage its budget and control integrate costs and it helps to make faster and more informed decisions (IBM, 2008). Additionally, the managers could investigate the reasons why there have deviations between the budget and actual results so that to identify inefficiencies and make some specific actions after they have found the reasons for the deviations.
For another, company should set up a control system that including specific standards and rules to monitor and manage the business. For instance, Tesco should employ manager to manage the day-to-day controls such as quality control, staff control and so on in order to run business efficiently. With a good control system, company can measure the business performance so that it can take appropriate actions to improve the performance.
Furthermore, variance analysis is important for manager to control its business. 'Variance refers to the difference between what is budgeted to happen and what actually happen' (THE TIMES 100, 2013). For instance, if sales revenue is higher than budgeted which enables the company to increase its profit, otherwise, if costs are higher than budgeted that enables organization to reduce profits. Therefore, managers can through variance analysis to keep their business on track in order to control the business (THE TIMES 100, 2013).
Furthermore, the term "budget" defined as "a quantitative statement for a defined period of time, which may include planned revenues, assets, liabilities and cash flows and so on, which provides a focus for the organization, aids the co-ordination of activities and facilitates control" (CIMA 2004, p. 2). According to Drury (2008, p. 355), there are various functions of budgeting. The first one is communication. Through the budget process, the managers could have a good communication of company's plans, goals, and changes with their employees, so it could let each employee have a good understanding of its objectives. The coordination is the second functions of budgets. For instance, the managers from different departments can coordinate with each other to make decisions. Otherwise, it may affect the performances and efficiencies of the company if they make their own decisions. In addition, control enables managers to find the different from the budget to actual, so they may easy to find some methods to solve the problems. Followed by compel which managers can plan ahead so that employees can follow the plan, that efficiency could be improved.
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Furthermore, the main approaches to budget include incremental budgeting, zero based budgeting. For the incremental budgeting, the last year actual plus adjustments equal this year's budget. The adjustment might include inflationary increases, salary increases and so on. However, in the zero based budgeting, every activity's budget will be set at zero in the starting of the year. The zero base budgeting introduce the project which spend the best cost of an organization will be succeed, it could let the managers have a better understanding of the whole organization that they know the priorities of organization. Also, it mainly concentrates on programmes or activities rather than functional departments (Drury 2008, p.371).
Moreover, continuous budget is to adjust the budget for the remainder of the current year to reflect the latest information and to extend the budget to provide a one year planning horizon. Nevertheless, flexible budgets may be helpful in determining the operational performance of managers. It will be prepared after the actual results are known.
Inter-relations between plan, control and budget:
Without doubt the terms of planning, control and budgeting are interrelated (Wildavsky 1986, p.15). However, they have different functions. Basically, each organization has its long term plans and short-term plans. The organization will set objectives, and identify strategies and actions to reach its objectives in the process of planning. Then the organization will prepare kinds of budget on resource allocation to meet the cost of its plan. Actually the budgeting could help to carry out for the long-term planning for the year. The budgeting could show the cost of its plan in detail, it also help the organization to run their money. After that, the organization will manage the controls. Control could make sure the resources are used in the best way, comparing the budget to actual could find some problems of the organization, it could let the organization have better management, increase the performance of employers, decrease mistakes and so on. Obviously, these terms have separate functions, but they will influence each other. For instance, the control system could let the organization compare budget to actual that they could find some deviation, identify the problems from the process of comparison. So that the company could take appropriate measures of solve these problems.
Furthermore, the budget could be divided into many types, including master budget, sales budget, production budget, purchase budget, direct labor budget, cash budget and so on. Company can depend on different budget that it needs to prepare different types of budgets. For instance, 'sales budget shows the intended selling price and expected quantities of a product that the company plans to sell' (Drury 2008, p. 364). In the sales budget it gives the forecast of sales revenue so that company may base on the sales budget to determine other budgets. Secondly, 'inventory budget is a specific presentation of monetary values related to company's inventory (Jane, 2013). It needs to identify the quantities of raw materials, finished products which stocked in the inventory. Also, it needs to record how many products leave the stock. Followed by the producing budget, which express in quantities of product and using the production budget to make sure that the production is enough to meet sales demand. Thereafter, purchasing manager is responsible to direct materials purchase budget because in order to meet the production requirement, managers should obtain the planned quantities of raw materials. It is beneficial to producing purchases budget because it allows manager purchase the materials at the right time and at planned purchase price. Finally, different departments within company may have different labor budget because managers need to prepare estimates of the departments' labor hours required in order to meet the production levels. Moreover, the rate of labor is decided by the industrial relations department (Drury 2008, p.364-365). Those are the basic budget that company must to prepare although it is complicated. Furthermore, preparing these budgets can help company reduce risk as they estimate the costs and profit before the plan carry out.
For one thing, when the budgets from above have been prepared, the master budget can be prepared, which including budgeted income statement, cash budget and budgeted balance sheet. It seems that master budget is the comprised of summary reports that offer the overall picture of budgeted performance and the position of organization. Also, in the master budget, all details and information can be found in the subordinate budgets for sales, production, direct material and direct labor and so on. For instance, budgeted income statement and budgeted balance sheet are the process of business financial planning that gives manager to decide whether the plan is feasible or it may lose money. In addition, company can compare actual and budgeted income statement to analyze the performance of the company and based on the data in the income statement to control the expenditure and other costs. Therefore, company can make use of budgeted income statement and budgeted balance sheet to make decisions and evaluate the plans whether company should carry out it or not (Wiley and Media n.d.).
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There are some advantages and disadvantages of master budget. One of the advantages is that the master budget could show overall business budget to the company executive at once, it could let them spend less time to know how much the company earns and expenditures in one year, position of the company. The other advantage is planning in advance. For instance, the company executives could find which department has overspent and cause the company loss money from the master budget, so that they could solve this problem with cutting the department's expenses or something else right now. One of the disadvantages of master budget is lack of specificity, because it is just a summary of the company' earning and spending, the managers could not find some details expenditure of each department. The other disadvantage is hard to read and update, because there are many categories, charts and numbers in the master budget, it would be very complex and lack of flexible enough, especially in the big company (Jane, 2012 ).
For another thing, cash budget is important for company as cash is the vital oil that lubricates the engine that is the business. It is important that company should make sure cash is enough at any time in order to meet the level of operation and production. It is known that there are a lot of uncertain in the business so when prepared the cash budget, it is essential to offer for more than the minimum amount required so that it can avoid the situation of stopping operation in the company (Drury 2008, p.369). additionally, the usage of cash budget is significant to company because it provides feed-forward control to the company not only through identifying the potential cash shortages which enable management to take action in advance to correct this, but also through identifying potential cash surpluses to enable management to make plan exploit this.
It seems that some aspects motivate budgeting within organization. The first aspect is the standing costs including controllable costs and uncontrollable costs. The controllable costs refer to one that managers are able to influence whereas uncontrollable costs are the costs that managers are not able to influence. It is necessary to distinguish controllable and uncontrollable costs in planning and monitors because company cannot use it to assess managerial performance as it is not fair to hold managers accountable for uncontrollable costs. Also, it needs to see the full picture of company to evaluate department performance. Company should ensure the elements affecting the management accounting control system. For instance, 'responsibility accounting involves the application controllability principle, which distinguishing between those items which managers can control and for which they should be held accountable and those items over which they have no control and for which they are not held accountable' (Drury 2008, p.398).
For another, second aspect of motivating budgeting is participation and imposed budgets. 'Participation refers to as bottom-up budget setting, which relates to the extent that subordinates or budgetees are able to influence the figures that are incorporated in their budgets or targets' (Drury 2008, p. 404). Participation involves more people in planning and budgeting which improve the communication within the company and it is beneficial to company because people might be motivated in achieving the targets they involved in planning and it helps to reduce the information asymmetry gap. But there is one disadvantage on participation approach that needs a mechanism for resolving disagreement as different people have different ideas on setting budget. However, 'imposed budgets refer to top-down budget setting whereby subordinates have little influence on the target setting process' (Drury 2008, p.404). It seen as demotivating approach which managers do not fell valued. But this method allows investors to analyze the market from the big picture all the way down to individual and it is likely to be preferable because the process is highly programmable and shows a clear and stable input-output relationship (Drury 2008, p. 405).
In addition, conflicting objectives of budgets may emerge in budgeting process, such as the planning and motivation roles, planning and performance evaluation roles, For instance, planning purposes budgets are set before the budget period based on forecasting, however the performance evaluation should be performed after comparing the actual performance with budgets. There will be a planning and evaluation conflict if the original budget has changed when the organization compare with them (Drury 2008, p.356). O the other hand, when organization setting plans, it is difficult to get the accurate figures for raw material usage, direct labor hours and so on. Therefore, targets may not be fully achieved as the budgets may include a degree of challenge to achieve maximum performance. So it is difficult for company to meet the objectives at the same time with one budget.
Without doubt that it is very useful for the budgetary information. First of all, it is useful for comparing the budgetary information with actual that we can know performance of the managers. Secondly, we could know the financial situation of the company from the budgetary information. In addition, the company's executives could find the issues quickly so that they could make decision rapidly. For another thing, based on the budgetary information, company can maximize its profits if managers can control and evaluate the operations and compare the actual results to make adjustments in order to reduce the cash flow risks. In addition, some companies may use the budgetary information to assess their performance of the company to see whether the company achieves the objectives or not, how well the company met its goals. For instance, BMW use the budgetary information to evaluate whether they reach the sales volume in a period or not.
However, budget slack may involved in the use of budgetary information. budget slack occurred when people purposely use biased information in creating budget such as under-estimate the amount of revenue to be generated, or over-estimate the amount of expenses expected during the budget period(accountingtool, 2013). Budget slack seems as negative behavior because it delivery biased information from budget owners to their superior authorities. However, in the views of budget owners, budget slack help to obtund the impact on their performance from unfavorable situations in uncertain business environment, so that they prefer encouraging to intentionally deviate away from the actual budget evaluation to make sure they shows good performance (Merchant 1985, cited in Wang and song, 2012). Therefore, it should be careful on the methods of budgeting company used, especially participative budgeting methods because the budget slack will have long-term negative effect on the profit and competition of company. Also, it should be paid attention on the performance of company because people may use biased information in order to show good performance.
In conclusion, it is no doubt that planning, control and budgeting are important for the company. The company does planning process in order to set up different objectives in the long-term and short-term period for better development. In addition, planning a specific goals also provide a clear picture of company for employees and managers so that they can pay attention on them, a clear objective could also motivate all employees and managers. In addition, control also plays a significant role for company because managers can through comparing budget to actual to make adjustments, therefore, company can reduce risks of cash flows. Furthermore, from budgeting, there are different types and different approaches for company doing budgets and company adopt a suitable method of budgeting depend on what they need and which method is beneficial for company. To sum up, organization should prepare and make use of the budgeting process to operate so that company can perform effectively and efficiently.