Steps In Preparing A Budget Accounting Essay


As Bhimany et al. stated in 2008 "A budget is a quantitative expression of proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan. It can cover both financial and non-financial aspects of these plans and acts as a blue-print for the company to follow in the forthcoming period".

The budgeting system is a conventional way of handling and directing companies. Financial departments use the budgeting method to plan and organize them company's business activities in the following year of their company. Budget is a standard with which the actual data can be compared. (Joshi et al., 2003)

Some of the primary purposes of the budget are to motivate employees, allocate resources and coordinate operations within an organization. Budgeting is aimed to facilitate responsibility distribution and is used to evaluate performance (Libby & Lindsay, 2003).

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Especially nowadays, because of the financial crisis that Greece and many other European countries are going through, businesses operating in those countries need to feel secured and protected. This is where budget gets involved in order to inform the management of the company on what will be the expenses for the upcoming year.

Main Purposes of Budgeting

Companies used budget at its very first years of existence as a control function only (Libby & Lindsay, 2003), but nowadays there are several objectives and purposes of the budget and the purposes differ from company to company. Drury (2004) mentions that the main purposes of budgeting are:


Companies must know that they act in the best way in order to achieve their goals and targets. This is where budget is coming to plan the future activities of the organization.

Planning budget is used to plan sales, financial issues, purchase of material, etc. Through planning, a company can be aware of how many recourses are needed, giving the possibility to plan inflows and outflows of liquidity.

The managers, who set a budget, must be aware of any future changes or problems that may occur. This gives the privilege to take actions in order to avoid that problem before it strikes the company (Granof & Khumawala, 2010).


All units within an organization are, more or less, dependent on each other. By using a budget the units have to cooperate and compromise when it concerns limited resources.

Every unit has their own budget and when these budgets are compiled, defects and inaccuracies are revealed. The budgets can be a way to discover coordination and cooperation problems.

The budget is meant to make it possible to see the organization as a whole and try to solve conflicts. If departments have different ways of doing things, the budget makes the departments' compromise and work together, in order to make the budget for the whole organization complete.

To reduce the risk of overcapacity within the company it is important to dimension the organization. By comparing budgets from departments they contribute to coordinate the size of production.


Budgets contribute to good communication through the exchange of information that takes place during the budgetary process.

The budget process enables employees to communicate and share their ideas with other workers within the organization. Through discussions, employees can share their opinions and ideas with each other.

For managers, the budget can be used to communicate and explain strategies and goals within the company to the employees. Furthermore it connects departments and gives insight and understanding for each other.

Resource allocation

Budgets are aimed to facilitate resource allocation within companies, secure that the resources are being used effectively and that the right amount is distributed to the departments, which is crucial.

Units in the organization get different priorities. By distributing resources to units, resource allocation could be seen as a control tool. However, this sort of management requires that the managers take an active part in the budgetary process.

They need to be well informed about the factual questions and have all concerning facts and details.

Performance evaluation

The budget functions as a control system for performance evaluation. By setting budget targets the accountable are held responsible for reaching the objectives. Through a follow up of the budget, which means when the budget is being compared with the actual outcome, managers can be evaluated.

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When follow-ups are made it is possible to discover variations from plan. Focusing and putting effort into deviations from plan is called "management by exception". By investigating the reasons to why the variations occur, actions can be taken. When budgets are made for shorter periods than a year, it can be valuable to make follow-ups every month and this enables changes if the actual outcomes vary from plan.

Hence, this requires that the original budgets are distributed correctly over the year and that managers have made an effort to make budgets as realistic as possible for every month. Analyzing the budget every year and examine if there are any large variations can facilitate to more usable budgets in the future.

Responsibility distribution

Budgets are often used for distribution of responsibility. A study proved that using a budget for distributing accountability is more important than using it as a control tool.

During the budget process, responsibility is assigned to employees and it is vital that the managers clarify what is expected from the employees. A follow-up is being made to guarantee that the managers/employees have lived up to their commitment. It is a mutual commitment between the company and the accountable.

The company contributes with the resources needed and the accountable are responsible for doing what they said they would do. Further, the budget is a tool to make managers responsible for their actions and to work in the best interest of the organization.

Establishing objectives

In organizations the budget is used for setting targets for managers. It is common that managers receive a bonus if they are able to "stick to the budget" and reach the goals. The objectives indicate what is important in the organization and what it is trying to achieve. Different targets for each unit within the organization are aimed to show what is expected of them.

The objectives for the organization are being divided into goals for every department. When setting a budget for a decentralized organization it is a prerequisite that the main budget is divided into budgets for every unit. Drury (2004) states that there are three different kinds of targets for an organization: mission, corporate objectives and unit objectives.

The mission of an organization is the reason to why the company exists; it describes in general terms, which the customers are, and what the concept of the company is. Corporate objectives are specific goals for an organization and the board of directors often establish them, e.g. return on equity, market share etc.

Unit objectives are the goals for the units in the company. While corporate objectives are seen as goals for the organization as a whole, unit objectives are made for different parts of the organization.


Budgets are used as a motivation tool. When employees are involved in the budget and target setting-process, they are often more motivated to try to achieve the goals. By setting clear and defined targets based on the budget, employees understand what is expected of them and can therefore feel more motivated. Though, this requires that targets are set on an appropriate level and that they are challenging but realistic. Meanwhile, if the targets are too difficult to achieve they could instead be de-motivating.

The main purposes stated above are complemented with two purposes by Ax et al (2009):


The budget creates awareness about the organizations goals and to make workers understand the "big picture". Personnel can understand how their work is contributing to the organization as a whole instead of just seeing their own unit (Ax et al, 2009).


Commonly, organizations use the budget as an incitement for the employees. The budget becomes a benchmark for what is a sufficient level to reach. By comparing the budget with the actual outcome, a reward for the accountable can be made (Ax et al, 2009).

Budgeting is a time-consuming and costly job. The development of a budget includes many repetitive steps before the budget is finally approved. As an example, participative budgeting (which is supposed to be a better model) involves managers at all levels (and sometimes all of the employees) developing their own initial estimates for sales, costs, etc. This process requires lots of negotiations between managers at different levels until a budget evolves which is acceptable to all levels (Langfield-Smith, Thorne & Hilton, 2006).

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Bartrum (2006) cites the Hackett Group's research to demonstrate that even the most efficient companies take 79 days to plan their budgets, while the worst take 210 days to complete the whole process.

The Ford Motor Company has calculated that they spent $1.2 billion annually for budgeting (BBRT, 2006). This is because it involves many people in the organization and absorbs up to 20-30 percent of top executives' and financial managers' time.

Steps in preparing a budget

According to Bragg (Bragg, 2011) these are the steps that should be done in order to prepare an efficient budget:

Update budget assumptions. Review and bring the assumptions which were used in the latest budgeting model to date.

Review bottlenecks. Determine what is constraining the company from generating further sales, and explain how this will influence any supplementary company revenue growth.

Available funding. Determine the most expected amount of funding that will be available during the budget period.

Step costing points. Determine whether any step costs will be sustained during the likely range of business activity in the upcoming budget period, and define the amount of these costs and at what activity levels they will be incurred.

Create budget package. Copy forward the basic budgeting instructions from the instruction packet used in the previous year. Update it by including the year-to-date actual expenses incurred in the current year, and also annualize this information for the full current year. Add a commentary to the packet, stating step costing information, bottlenecks, and expected funding limitations for the upcoming budget year.

Issue budget package. Issue the budget package individually, where possible, and answer any questions from recipients. Also state the due date for the first draft of the budget package.

Obtain revenue forecast. Obtain the revenue forecast from the sales manager, validate it with the CEO, and then distribute it to the other department managers. They use the revenue information as the basis for developing their own budgets.

Obtain department budgets. Obtain the budgets from all departments, check for errors, and compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as necessary.

Obtain capital budget requests. Validate all capital budget requests and forward them to the senior management team with comments and recommendations.

Update the budget model. Input all budget information into the master budget model.

Review the budget. Meet with the senior management team to review the budget. Highlight possible constraint issues, and any limitations caused by funding limitations. Note all comments made by the management team, and forward this information back to the budget originators, with requests to modify their budgets.

Process budget iterations. Track outstanding budget change requests, and update the budget model with new iterations as they arrive.

Issue the budget. Create a bound version of the budget and distribute it to all authorized recipients.

Load the budget. Load the budget information into the financial software, so that you can generate budget versus actual reports.

Budget Arguments

Hope and Fraser (1997) argue that with the big changes in the business world, intellectual assets accounting for 80-90% of market capitalization. While many companies recognize that the underlying source of future cash flows increasingly comes from the effective management of intellectual assets, it is beyond the capability of budgets to properly account for these intellectual assets.

In other words, only 10-20% of a company's value can be analyzed by its budget. Banks in Scandinavia using budgets have an average 70% of cost/income ratio. In contrast, Svenska Handelsbanken, which does not utilize budgeting, has a 45% cost/income ratio (Hope & Fraser, 1997).

This shows that budgets add little or no value to shareholders' assets. Budgets are rigid, restricted and fixed to artificial period. The budget period can be too long to adapt today's dynamic and quickly changing market; conversely, the fiscal year may be a too short-term horizon for planning and steering some major activities of today's companies, like R&D, brand development or growing business relationships between partners and potential customers. So budgets can restrict or hinder business and organizational development in the long run while adding little, if any, value to the business.

How do budget enhances control?

Owing to the adverse consequences of violating budgetary mandates, both governments and not-for-profits can build safeguards into their accounting systems that help assure budgetary compliance. These include preparing journal entries both to record the bud- get and to give recognition to goods and services that have been ordered but not yet received. We begin the discussion by describing the basic books of account maintained by governments and not-for-profits and showing how they accommodate these safeguards.

The basic books of account of both governments and not-for-profits correspond to those of businesses. They consist, either in manual or electronic form, of:

Journals, in which journal entries are recorded. Most transactions are entered initially in a special journal, such as a property tax cash receipts journal, a parking fines cash receipts journal, a purchases journal, or a cash disbursements journal. Both no routine transactions and account totals from special journals are recorded in a general journal.

Ledgers, in which all balance sheet and operating accounts are maintained. The general ledger consists of control accounts that summarize the balances of the detailed subsidiary accounts that are maintained in subsidiary ledgers.

Key phases of budget cycle

Budgeting practices in neither governments nor not-for-profits are standardized; they differ from entity to entity. However, irrespective of whether the budget is of object classification or performance type, in most organizations budgeting is a continuous, four-phase process:


Legislative adoption and executive approval


Reporting and auditing

Budgetary Control

The budgetary control states:

The identification of controlled and non-controlled items

On the issue of the hierarchy of control

The effectiveness and impact of control

The importance of deviations and limits of control

The positive and negative aspects of Budgeting Control

Controlled and non-controlled items

The budgetary control requires:

The separation of spending controlled (elastic) and uncontrolled (inelastic) costs.

The separation of business centers or areas of responsibility.

Should endeavor to increase the controllable costs, otherwise we will end up in bureaucratic administration, which is remote from the centers of expenditure and therefore not aware of the real needs.

Hierarchy Of Control

Mainly, the content of feedback at different levels of government. The information about the result of the modulated according to the level of responsibility and authority in which the auditee is under budget.

Each officer is informed of the outcome of its area of ​​responsibility and the lower. The separate and detailed information moves from the lower to the upper levels of government increasingly centralized and ensures the project evaluation in upper and central government on the state of the business.

Effectiveness Of Control

The effectiveness of control depends mainly

The acceptability of the budget of those who would have to implement.

The degree of power in relation to the responsibility assigned to each level of the hierarchy.

The responsibility must go hand in hand with responsibilities.

Easy flow and completeness of information. The budgetary control is simple, understandable, and documents the findings.

Signifocance Of Gaps

A deviation is significant when leading the administration to take corrective measures. Defining the boundaries of permissible differences are either statistically or empirically.

Deviations must answer the following questions:

Where are due

The factors that cause is accidental or not

They could provide

Positive and negative elements

The budget establishes quantitative and temporal action programs

The budget control gives specific content to power and responsibility of management.

The budgetary control system is an information and coordination activities.

The budgetary control minimizes time detection of errors and accelerates the process of solving.

There is also the possibility that the budget will cause problems in effective business and human relationships, based on faulty projections imposed by authoritarian no overall premise of objectives and a means of policing rather than encouragement of people in taking the right initiatives.

Setting The Target

The budget is based on normal and not standard. Serve short-term goals but must be aligned with a long-term strategic goal. When you enter this strategic objective all directions and plans of action programs seek to achieve.

Such strategic objectives are:

Increase market share

Reduction of production costs

Increase Profit

Increasing Competitiveness

Goal setting is necessary because:

Establishes a disciplined approach to solving problems

Enters single mindset in business

Coordinates the implementation of programs and budgets

Important Facts

The design can be long and short term.

The strategic goal is not structured problem but a vision.

The long design gives directions leading to vision.

Long-term programs covering a period of 3-5 years and up to 10 years.

The programs cover a short period of 6 months to 1 year.

The short programs are characterized by clarity, accuracy and detail items not characterize long.

It should however be noted that the

Budget Organizational Integration

Management Board

Budget Board

General Management

Financial Management

Budget Department

Budget Development Cycle

Budget Department

Sector Manager

Budget Department

Budget Department

Budget Board

Budget Department


Update fellows each action area with Instructions.

Directions and Schedule are given.

Prepares Budget for his /her sector.

In meeting the General Manager under the charge of each sector presents the budget of each sector.

Delivered by individual budgets to the Head of the Department of Budget.

The Head of Budget prepares the general budget of the Company.

Presented the General Budget Plan.



Updated every sector for their final-TARGET

The Problem

Despite the massive use of budget around the world, budget is not yet the best tool of controlling and forecasting. (Hansen et al., 2003)

There are many cases where budget calculation digressed the first predictions of the financial departments of the companies. This can lead to unexpected financial results, causing damages to the company that occasionally may need much time to be fixed.

The worst scenario is the default of the company who has failed to conduct a realistic budget. Especially in Greece, due to the sudden financial crisis that hit the country in 2010, companies must feel safe and financially protected. The correct budget prediction offers these two feelings.

What is missing from many budget calculation systems is the factor of an unexpected event that may have impact on the financial results of the company (e.g. financial crisis) but this is something that has been accepted because we can't predict the future. Many companies have the principle of " same weather tomorrow as today" (Wallander, 1999), but it is obvious that this can lead to terrible budget mistakes.

A big drawback of the companies around the globe is that they try through their budget to be competitive and show their power (sometimes with tricky means), instead of setting short-term budget targets for their own use and not for the competitors (Fraser & Hope, 2003).

But there are other important factors that many budgeters don't take into consideration such as the general trends and requirements of every period. For example when the European Central Bank predicts a recession of 4% for the following year, that budget that is going to be created for the next year should convert that information and include it into the budgeting model.

The last but not least factor is the seasonality of the company. Not every company sells the same amount of products every month of the year. So what must be taken under serious consideration is the seasonality percentage of each company.

But budgeting problems don't end here. It is also well known that budgets create a big deal of waste and behavioral problems. Hope and Fraser (1999) use the words of Jack Welch, from General Electric who was claiming that making a budget is an exercise in minimization - "you are always getting the lowest out of people, because everyone is negotiating to get the lowest numbers". Obviously, what people's main goal is, is to meet the budget. As a result, they always try to negotiate to get lower targets with lower sales and higher cost, which are well known as padding the budgets.

Despite slack sales budgets, people also try to spend all of their obtained budgeting funds rather than use what they need. There are some other budgeting games conducted by people, such as cooking the books. When sales have exceeded the budget, people delay booking the revenue. Conversely, they forward book revenue if they are behind the budgets. All of these sorts of behavior make the budgeting system lose credibility and cause waste. On the other hand, the current common rewarding practice also promotes people's non-ethical behaviour.

When trying to meet the fixed budgets to obtain bonuses, people are encouraged to focus on the things affecting their bonus, rather than things that may be more important, such as long-term investment, R&D and customers' satisfaction (Dawn, 2004).

Interestingly, surveys show that non-financial quality measures dominate the effects of financial measures when both are included in the regression. Non-financial measures often create a focus on the future, as opposed to historical financial measures, which create a focus on the past. (Hirschey et al., 2001, as cited by Maines, Bartov & Fairfield, 2002).

This actually may give some clues why budgeting figures fail to provide reliable prediction for future business running. Budget also reinforces a dependency culture and de-motivation of employees i.e. "do what you told and meet the budget". It encourages people to avoid taking risks, thereby stifling development and innovation.

The Issue of Budget Analysis

Compared with its costs, budgets offer little valuable and they inevitably provide irrelevant and unreliable data to the users. On the whole, budgets are based on assumptions that often turn out to be incorrect. Budgets are generally backward-looking and inward-oriented instead of being market-oriented.

In addition, the very short of the time period to analyze the data, maintaining consistency and obtaining data to analyze the budgeting figures, also explain some of the problems (Abrams, 1982). One 1999 global best practices study shows that only 21% of finance staff time was spent on analyzing the budgeting numbers while 79% of their time was spent on valueless activities (BBRT, 2006). This can explain some of the reasons why low value, unreliable, sometimes almost useless information is submitted to the management.

A report by Neely et al. (2001), lists the 12 most mentioned disadvantages of budgetary control as:

Budgets are timewasting procedures to put together

Budgets focus on cost reduction and not value creation

Budgets constrain responsiveness and are often an obstacle to change

Budgets are rarely strategically focused and often contradictory

Budgets add little value, especially given the time required to prepare them

Budgets reinforce vertical command-and-control

Budgets encourage gaming and perverse behaviors

Budgets are developed and updated too infrequently, usually annually

Budgets are based on unproven assumptions and speculation

Budgets instead of encouraging knowledge sharing they create strengthen departmental barriers

Budgets make people feel undervalued, and

Budgets do not reflect the emerging network structures that organizations are 
adopting (Hansen, Otley, and Van der Stede, 2003).

Practice Developments In Budgeting

It is upon every company to decide which budgeting approach it will choose. The two big budgeting development groups are ABB (The Activity-Based Budgeting Approach) and BB (The Beyond Budgeting Approach).

The Activity-Based Budgeting Approach

As its name implies, the ABB-approach7 focuses on generating a budget from an activity-based model of the organization, as opposed to the traditional product-market, responsibility center, or departmental focus.

The Beyond Budgeting Approach

In his seminal management control framework, Anthony (1965) distinguished management control, of which budgeting is a critical element, from two complementary control processes: operational and strategic planning.

Budgeting And Forecasting Process

Undoubtedly the expectations from corporate strategic planning have increased as a result of the changing competitive landscape and the availability of new technology. But even though companies are now spending more time than ever creating more detailed and more frequent budgets and forecasts, we are still in the early stages of advanced corporate planning. Most companies are still not happy with the planning processes they have in place and the results they see. Some often cited complaints and concerns are:

Lack of employee motivation and initiative during the planning process

Lack of clearly defined strategies to drive planning and forecasting efforts

Minimal correlation between corporate strategy and operational plans

Politics, rather than strategy, influencing the planning process

There is little doubt that every company has room for improvement. However, the improvements must start within the organizations themselves, with a re-engineering of the planning process. Unless the organizational issues are addressed, the planning and budgeting process will not be as effective nor as useful as it needs to be.

According to leading management consultants, certain key issues should be addressed in order to streamline the planning process:

The amount of planning data should be limited.

The type of planning data produced should be standardized.

Data should be shared across the organization, in real time.

Employee compensation should be tied to strategic plans.

As companies continue to redefine their budgeting and forecasting processes, several key trends have begun to emerge: 

Tighter integration of corporate strategy with budgeting

Added detail in strategically important areas (such as revenue)

More complex models

Improved accuracy of budgets and forecasts

Integration of available resources and tools

More frequent revisions (re-forecasts and rolling forecasts)

Increased employee participation and departmental involvement

Streamlined budget reviews and approvals

Trends And Seasonality

When estimating a time series model such as an autoregressive moving-average (ARMA) model, it is common to first remove the trend and seasonality from a the data in order to isolate the non-deterministic behavior. This paper describes such methods for unevenly-spaced (also called unequally- or irregularly-spaced) time series.

There exists an extensive body of literature on trend and seasonality estimation for equally- spaced time series data, see Cleveland et al. (1990), Chapter 1 in Brockwell and Davis (1991), Chapter 9 in Box et al. (2004), and the U.S. Census Bureau's website. On the other hand, few methods exists specifically for unevenly-spaced time series, even though such data naturally occurs in many industrial and scientific domains, such as astronomy, biology, climatology, economics, finance, geology, and network traffic analysis.

Perhaps the most common approach is to transform unevenly-spaced data into equally- spaced observations using some form of interpolation - most often linear - and then to apply existing methods for equally-spaced time series. However, transforming time series data in such a way introduces several biases, see Scholes and Williams (1977), Lundin et al. (1999), Hayashi and Yoshida (2005), Rehfeld et al. (2011), and Eckner (2012). In particular, as shown below, linear interpolation tends to "trim down the valleys and fill in the troughs" of seasonal fluctuations. In other words, seasonality estimates based on linearly-interpolated data can severely underestimate the true extent of seasonal fluctuations.

Basic framework

We use the notation ((tn,Xn) : 1 ≤ n ≤ N(X)) and (Xtn :1≤n≤N(X)) to denote an unevenly-spaced time series X with observation times T (X ) = {t1 , . . . , tN (X )} and observation values V(X)=(X1,...,XN(X)), where N(X) denotes the length of the time series. T denotes the space of real-valued, unevenly-spaced time series. For a time series X ∈ T and time point t ∈ R, X[t]l in denotes the linearly-interpolated value of X at time t. Sampled values X [t]lin before the first observation time, t1, are taken to be equal to the first observation value, Xt1 . See Eckner (2012) for a systematic analysis of unevenly-spaced time series and operators for such objects.

Trend Component

This component is characterized by long-run increase or decrease over time (overall upward or downward movement), which data are taken over a long period of time. Trend can be moving in many directions and ways like upward or downward and linear or nonlinear such as exponential growth.

Macintosh HD:Users:giorgosvlachos:Desktop:Trend Component.png

Trend Estimation

Consider a time series X ∈ T of the form Xt = mt + Yt, t ∈ T (X) ,

where m is a deterministic trend and Y is the realization of a stationary stochastic process with mean zero. If necessary, we first apply a transformation to X, such as taking the logarithm, to achieve this form.

Seasonal Component

It is characterized by short-term regular wave-like patterns. It should be observed within 1 year and often monthly or quarterly. Monthly data has 12 observations per year Quarterly data has 4 observations per year. Daily data has 5 or 7 (or some other number) of observations per week. Sunspot data is cyclical, not seasonal, because distance 
between peaks is random. Just because we have 12 observations per year, this does not necessarily means that there is seasonal behavior (e.g., stock prices show no regular seasonal patterns).

Macintosh HD:Users:giorgosvlachos:Desktop:Seasonal Component.png

Trend and Seasonality Model

In order to isolate the non-deterministic behavior, it is common to first remove the trend and seasonality from a the data.

There exists a wide body of literature on trend and seasonality estimation for equally-spaced time series data, see Cleveland et al. (1990), Chapter 1 in Brockwell and Davis (1991), Chapter 9 in Box et al. (2004).

The simplest (and oldest) model for time series is the so-called component model:

yt = Ï„t + st + ut

where τ is a deterministic trend, s : [0, d) → R is a deterministic seasonality of period d with normalization ∫t0t0+d stdt = 0 for all t0 ∈ R, and Y is the realization of a stationary stochastic process with mean zero.


Ï„t the trend component (capturing the long-run tendency, like in population growth), e.g.

τt =c0 +c1t+...+crtr,

st the seasonal component (capturing cyclical components related to the season of the year, like Christmas sales bursts), e.g.

st =β1d1,t +...+βSdS,t


ds,t a seasonal dummy and

ut the irregular component (basically everything else; not quite foreseeable events).

Sometimes, a multiplicative model may be better, yt = Ï„t st ut; the multiplicative model can be reduced to the additive one by taking logs if ut is always positive (sales are often modeled like this).

The trend is understood by some authors to represent the entire deterministic com- ponent (i.e. trend and seasonal component), so pay attention to which one is meant; we'll speak of deterministics and understand both trend and season.

While the trend and the season are deterministic, we shall model the irregular component as being essentially nondeterministic; a stochastic process is the best model that comes to mind.

Note that the stochastic component ut is not specified concretely. Intuitively, we would like ut to be stationary; thus, one can understand the component model as being a framework within which data can be transformed to stationarity.

Joint Trend and Seasonality Estimation

Consider a time series X ∈ T of the form Xt = mt + st + Yt, t ∈ T (X) , where m is a deterministic trend, s : [0, d) → R is a deterministic seasonality of period d with normalization ∫t0t0+d stdt = 0 for all t0 ∈ R, and Y is the realization of a stationary stochastic t0 process with mean zero.

Method (Iterative Estimation). The trend and seasonality can be jointly estimated using a simple iterative scheme:

Step 0: Initialize sˆt ≡ 0 on [0, d).

Step 1: Estimate the trend of X − sˆ.

Step 2: Estimate the seasonality of X − mˆ.

Step 3: Repeat steps one and two until convergence.


Macintosh HD:Users:giorgosvlachos:Desktop:Example.png

We illustrate the joint trend and seasonality estimation using the time series of the atmospheric CO2 concentration (measured in parts per million) at Mauna Loa Observatory, Hawaii. The observations are from March 1958 through March 2012 (as of this writing) and at a monthly frequency. There are 12 missing value and 642 observations in total. Figure 1 plots the original time series (on the left-hand side), and a subsampled time series with 80% of the observations randomly removed (on the right-hand side). In both cases, individual observations are connected using straight lines, which amounts to plotting X[t]lin as a function of time t. In the second plot, individual observations in addition are marked by the symbol x.

The average spacing of observations in the subsampled time series is five months. In ten cases, the spacing is more than one year, which is more than the period length d of the seasonal component. Figure 1 illustrates that a trend-seasonality estimation procedure based on a transformation to equally-spaced data via linear interpolation would severely underestimate the seasonal component. The same is true for the human eye, which has a tendency to connect dots using straight lines.

Using a log-transformation, I estimate a multiplicative decomposition of the form Xt = mt (1 + st) Yt using local linear smoothing for the trend estimation part. Figure 2 plots the estimated trend and multiplicative seasonal component for the original and subsampled time series. Given the highly irregular nature of the latter time series, both decompositions are remarkably similar.

Finally, we estimate the same multiplicative decomposition using R's stl() function, which is based on Cleveland et al. (1990). Figure 3 plots the estimated trend and multiplicative seasonal component for the original and linearly-interpolated subsampled time series. We see that stl() and the methodology in Section 4 produce a virtually identical decomposition for the original CO2 data. However, for the linearly-interpolated subsampled time series, stl() severely underestimates the variability of the seasonal component. As a consequence, the estimated residual time series Yˆ exhibits excess variability, since it absorbs some of the seasonal fluctuations.

Based on a simulation, Table 5 shows the expected percentage bias in the peak-to-trough size of the seasonal component as a function of the missing data fraction for (i) the iterative algorithm in Section 4 and (ii) the STL procedure with linearly interpolated data.

Macintosh HD:Users:giorgosvlachos:Desktop:Example 2.png

To be fair, the STL procedure actually was designed to handle missing values, although not unevenly-spaced data per se. It is widely used among statisticians due to its flexibility in capturing time-varying trends, time-varying seasonal components, and automatic choice of sensible parameters. In fact, the large bias in the estimated seasonal component is entirely due to the input time series. Any trend-seasonality estimation method applied to linearly- interpolated data is bound to encounter the same problem.

Macintosh HD:Users:giorgosvlachos:Desktop:Example 3.png

*Example taken by: "A Note on Trend and Seasonality Estimation for Unevenly-Spaced Time Series", Andreas Eckner, 2012.

Trend Detection

How is it possible someone to determine whether there exists a trend in a given time series? This problem is usually referred to as trend detection and solved by different means of statistical tests, which require specification of a trend model.

One of the most extensively studies is the detection of monotonic trends. One of the widespread tests for this problem is the non-parametric Mann-Kendall test and its modifications for handling seasonality (Hirsch & Slack, 1984) and auto-correlated data (Hamed & Rao, 1998).

Among others are: the parametric t-test and the nonparametric Mann-Whitney and Spearman tests. Berryman et al. (1988) describes many methods for monotonic trend detection and provides a selection algorithm for them. For more recent developments see the review of Esterby (1996), which is focused on hydrological applications; also see the comparative study Yue & Pilon (2004), which describes some bootstrap-based tests.

Seasonality Adjustment

Annual budgets are not very useful as a tool because they make it difficult to monitor actual versus budget results throughout the year. The worst approach is to simply divide an annual budget by 12, because many line items are subject to seasonality. For example, actual revenue may be twice as high in some months compared to other months, but comparing these seasonal sales amounts to a non-seasonal budget is virtually meaningless because you can't tell whether you are on target, off target, or by how much. Therefore, it is difficult to determine if corrective measures are needed on a month-to-month basis.

Seasonal budgets make a big difference. I believe one of the primary reasons companies don't analyze their budgets to actuals throughout the year is because their budgets weren't seasonal to begin with, and therefore the comparison was virtually meaningless. Starting by calculating the percentage of a given line item's expense that occurs on a month-to-month basis. If the answers each year consistently shows percentages significantly below or above 8.33% for a given month, then, this was a detection of a seasonal lump or dip in the budget and the percentage to use in predicting that same lump or dip next year.


The company of the case study

The company (company X) is classified among the leading aluminum manufacturing industries in Greece. After almost three decades of hard work, research, innovative applications and continuous development, the company is now considered to be a landmark in the aluminum extrusion sector, with continuous and well established presence in both Greek and European markets.

History of the company

Company X was founded in 1975, aiming at the production of aluminum profiles for architectural use. From the earliest stage in its development, and with a number of staff limited to only three [3] people, its mission statement made explicit reference to the manufacture of high quality and aesthetically attractive products. To achieve its objectives, the Company focuses on:

human resources and

modern means of production

In the late 1980s the Company designed, developed and marketed its first extrusion product line. The faultless fit, the absolute functionality, the high aesthetics and the fine finish of the company succeeded in meeting the most rigorous standards, thus gaining the preference of both professionals and consumers.

To maintain the high quality of its products, the company operates a Quality Control Service at every single stage from the production and handling, to the delivery to the points of sale. As a reward for its insistent efforts in manufacturing high quality products, the Company was the first in the aluminum extrusion industry to be awarded with the ISO 9001 certification.

Today, the company holds a leading place in the extrusion field, owning a contemporary and dynamically evolving production unit. The later, together with the electrostatic coating of extrusion products unit and the 450 specially trained employees, equip the Company with the tools to deal creatively with the challenges that lay ahead.

Policy of the company

In the 35 years that the company has been active at Inofyta in the Boeotia region and has been contributing to the Greek heavy industry, the Company always took notice of and gave serious consideration to the changing circumstances and corresponding needs that arose from these circumstances at different points in time. As a result, the Company has both studied new and highlighted priorities and acted towards their fulfillment.

The company continues to recognize that the quality of its products and services is a prominent condition for the satisfaction of the high demands of its clients and for the establishment of a relationship of trust with them.

The Company considers it to be its obligation to always make sure that the aforementioned considerations are in accordance with the Company's long-term policy of respectfulness to its employees. EUROPA PROFIL ALUMINIUM S.A. is committed to follow closely and to implement accurately and without compromise the Safety and Hygiene rules in the work environment in order to sustaining a work environment in which accidents are prevented, working risks are reduced and the health of the employees is promoted.

In the context of the Company's previously mentioned strategy of highlighting new and current priorities, company X makes a separate and explicit reference to its unwavering and long-term held conviction that a responsible environmental and social policy which meets all legal requirements and fulfills its own high standards is not only equiponderant but, moreover, it constitutes a necessary condition for the operation of its productive process, for the quality of its products and corresponding services as well as for the fulfillment of its uncompromised implementation of Health and Safety standards for its employees.

Facilities of the company

The registered offices and the production center of the company are located on the 56th km of the Athens - Lamia National Road, at Inofyta, Boeotia. The ultra-modern production facilities is developed over 170,000 square meters, where the company has installed and organized the following spaces:

Three automated Extrusion lines, of a yearly production capacity of 24,000 tons of profile

Three automated Powder Coating lines (two vertical and one horizontal)

Modern wood decoration surface treatment plant

Special Processing Department

Special Aluminum System Design and Development Department.


Europa is one of the best-managed corporations in the region. Compared with its peers in the aluminum extrusion industry, Europa, is the most financially sound, with a record of profitability since its establishment in 1975. The company is debt-free and profitable, even during these crisis times, as evident by the summary below.

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Interview by a manager from Company X.

In your opinion what is the reason of implementing a budget?


The reason for businesses to be able to predict the future in the next year (or years) is the main reason for creating the budget. Designing firm in the budget is likely to know how to move in the next year. If provided for Example of declining revenues should somehow be seen and what expenses will reduce what those costs, flexible - rigid to be cut. Also in case of a reduction in revenue will be made and the necessary steps to replace the lost revenue before proceeding to reduce expenses. For example, the renewals of existing clientele in a service business, or launch a new product in a productive enterprise are essentially the main factors for increased revenue and replacement of lost revenue. Unlike in the case that increasing revenue is expected to be made those moves that will create and corresponding expense. For example, the increase in turnover of a business by itself can not be construed as if not longevity and their movements creating the corresponding output (eg hiring new exidikefmenou prosome to be able to support the expected increase in turnover, or am example, advertising the new product is launched). Thus the relative income - expenses are directly connected and algae arikta like features called economic cycles, for any income there is behind an exit.


How did the company start the budgeting implementation? Why chose that method?


In most cases a budget deviate from the actual results because it has done wrong estimation of expected revenue. Therefore, the main concern in building a budget is the correct estimation of expected int roads (increase or decrease). Thus providing the correct expected revenue can calculate and draw the corresponding costs. However the design and creation of a budget requires the full cooperation of several departments of a business. If the market does not address accurately substantiate the expected revenue, inevitably will draw the wrong estimates of remaining addresses etiarias (eg human resources, oikonomikli management, general management, etc.). The main reasons for choosing this model is that analyzing seasonality and by providing the most possible accuracy expected income, you are able to estimate with relatively small deviations the result of enterprise (loss / gain)



What kind of budget methods have you used?


The species budget used are 2. The budget which has the form of P & L of etairias.kai from which calculated the expected revenues to revenue accounts (group 7 of the General Accounting) and the expected expense accounts expenses (groups 2, 6, 8 to the accounts of the General Logstikis). This way you have the full control over financial reporting at the company general ledger accounts, and you can compare at the account level the discrepancy between the realized sprouts mation and budgeted. ¸ image Another way is to compute the expected revenue and expected output not at the level of itemized bills, but at class level revenue expenses. In this case you have an overview of the results of the enterprise, which does not give the flexibility of the P & L the accounts of the general ledger.


In which fields of the company do you use the annual budget?


There are specific areas for use in the annual budget. When creating budget to create a business in order to have an overall picture of how to move this company to the next year. The reason for the creation of budget as mentioned above is timely and accurate information of the company and the right strategic planning and decision making. Certainly when you create a budget can in some cases to build and Budget per section, but this requires the fullest possible information as the company with the respective Centers Kosotys, something not often found in the majority of Greek companies. For example you can set budget Production per department or Administration or mood but this requires that each department is a cost center and not a merger expenses in general categories of Production - Administration - Distribution.


Have you find any changes at the financial results of the company at the "before and after budget period"?


Any changes that you can see that there must be at diamoirfonontai ton over months and provided that the closing of the month, comparing the outturn Budgeted items. But once you make any change in the budget in essence, you cease to have budget and you create forecast. This is due to the fact that allgi s you've done have included features of the prior year's results, so now move at light new data and adjusts the budget your new requirements. If for example you know that you are moving with a constant seasonality, but the trend estimate of expected income shows deviation from the true trend, we will need to make some structural changes. But now it no longer called budget and falls under the category of forecast.



Does your budgeting model needs any improvements and where?


What should be noted is that the companies operating in the Greek market in a very small have a value of able and experienced members in action - creating the budget. Generally, the analysis of both cost and budgetary outturn as at a very infantile form so that the information phase to a small percentage rV businesses. Therefore, over the years many theories will kataripthoun budget and new models will make their appearance. However this does not mean that the way it requires the correct estimation of the expected revenue will change, because as mentioned above to set up a budget starts from the correct estimate of revenues. A good way too reassessment of budget (Which is a few companies worldwide - etiaries Kolosi eg Sony - Samsung etc.) is the replacement of the daily budgeted revenue with the corresponding realized. This alone creates a completely dynamic model that automatically comes to correct the mistakes of the previous day. However, and this in reality it ceases to be a budget and is forecast.

Tell me how you organize, plan, and prioritize your work.

The job of planning department have various forms depending on the analysis of data collected by the general accounts. This requires a daily check (in any form of business is possible) in both revenue and expenses. Monitoring the effects of general accounting and cost accounting mainly in industrial companies is the main way to ensure results and compare them to the budgeted expenses receipts. Once the closing months of the company and can export balances - tabs with the final results then begins the final processing of the data and its representation in the different formats of the company to be compared with the budget as well as actual data with past or i beings years for the final extraction of reports.

Name a time when you identified strengths and weaknesses of alternative solutions t o problems. What was the impact?

The deficiencies may occur in an enterprise depend on several factors. One of the most important factors is the lack of organized infrastructure systems (ERP) as this makes it difficult to arrive at conclusions. Also another important factor is the failure of understanding between relevant departments for a particular job. This happens many times have preceded some actions without informing all parties involved. If the error is seen after the closing of the general ledger created problems not directly epilyontai. If seen before finalization can be given a communication solution with the parties involved.

Provide an example w hen your ethics were tested.

What are some long-range objectives that you developed in your last job? What did you do to achieve them?

Observing through the analysis of the budget   that sales were declining, had to take some decisions to reduce costs. After several studies and statistical analyzes adopted a number of proposals, some of which lead to cost reductions. One of these was to increase production levels in rV some product codes, so as to create an additional stock which resulted in the reduction of production costs in a significant percentage through the various synergies made.

How do you ensure that expenditure controls are maintained?

In advanced ERP systems There are safeguards that allow you to pre-set a maximum expenses which you want to make another in a specified period (eg, month) so that no warnings as you approach the predetermined amount and ringing alert when you get over it.

Tell me about a time when you developed your own way of doing things or were self-motivated to finish an important task.

As to the fourth question. It may also be mentioned that found the min stock production by product code, so as to ensure that no production codes allowed below a threshold, because it does not provide the min production costs.

How do you ensure that budget estimates are complete, accurate, and conform to procedures?

As mentioned, the creation Budget requires cooperation of many parts - the address of a company. Therefore, every company has some safeguards and some models on which the calculations are made and checks that guarantee the operating rules and calculation of the budget. For example, to approve the budget a company should be considered by the Chief Financial Officer of the company.

Share an experience in which your review of budgets helped you discover tr ends which affect budget needs.

Provide a time when you were able to identify a complex problem, evaluate the options, and implement a solution. How did the solution benefit your employer?

Taking some time some information based on analysis of various statistical parameters, I found that avoidable costs which until that time were not anticipated in the business. therefore parousiazontas these studies and adopting them succeeded from the first month to take the production cost of 5% and reached some time to reach the max amount was 18%.

Provide an effective method you have used to ensure that budget adjustments are made in accordance with program changes.

Share an experience in which you successfully determi ned financial resources required to implement a program. What methods made you successful?

Tell me about a policy you established which successfully helped carry out budget directives.

Because in Greece matter so outturn cost and budgeting is completely infantile form for businesses to create a budget itself is something protognoro for most enterprises. In recent years with the explosion of the phenomenon of recession many companies have decided to develop costing segments to reduce operating expenses and forecast next year's results. Such a policy introduced in the recent past was a simple budget existed to analyze form per account at any time, knowing I had taken corrective actions, without waiting for the result of revenue - expenses. This of course in order to become free and safe demanded m months of intensive work, because they had to collect actual data from previous years and analyzed per account.

What is the key to a successful budget?

The correct prediction of income of the business for the time you want to do budget. Budget The tithontai off targets in 90% of cases of miscalculation of expected revenue.

Share an experience in which you improved efficiency and increased profits.

Share an experience in which you effectively matched appropriations of a specific and a broad program.

What have you found to be the best way to monitor the performance of your work and / or the work of others? Share a time when you had to take corrective action.

The best way to enable organizations to effectively work both your own and involved colleagues to work with a dead lines. Given that the subject Budget and the prior year's comparison - budgeting data should be if nothing else and validly and timely, you must be dedicated to dead lines available to businesses in the image given the right moment, so that the necessary corrective actions. If for example you on prior year comparison - budgeting data back to March in May or June can not anticipate the desired results, nor receive any timely decisions. So the allowance of such information is necessary for the business, the only right way is to move within the required algae predefined schedules.

Provide an example when you were able to prevent a problem because you foresaw the result of the budget analysis. How did you deal with it?

Has happened to propose to stop cooperation with a customer because it was damaging. Ie costs that were budgeted and the outturn costs are not consistent with the pricing. So there are 2 ways: Either change the sales price list (because of underestimation in the past to assert that customer had given very low bid to join the clientele of the company) or stop the cooperation. Since both the client was opposed to changing pricing policy management etiarias decided to stop cooperating with the concrete.

18. What are functions of Budget position? What are tasks that to implement each function?

19. How to do each Budget position task / function?

20. What are output of each Budget position task / function?

21. How to measure each task / function?

22. How to control each task / function of Budget?

23. How do you calculate the total sales for the next year?

When the business to provide services must be forecast in t Ziros of your customers because your turnover by Mr. directly dependent on the movement of your customers.

On productive enterprises should predictions of the impact of product p rageis a market that sell.

The calculation of sales in each case depends on many factors such as seasonality, trend demand, recession or boom, reflects importance of the product to customers. Moreover in many cases must take into account the percentage impact on the market it operates, whether it has growth potential - penetration into areas not previously possessed.

24. How do you check and adjust your total sales?

In all business receipts appears from the pricing of your customers. Now in modern times the penetration and development of ERP programs that control is relatively easy. The income of each company credited to accounts of group 7 anaexartita kind of activity of the enterprise. So with balances, customer files, various checks are made automatically to client subsystems - General Ledger can test and ensure the compliance of the company's total sales.

25. H o w do you check your targets for the upcoming year?

26. What are your actions when you face a budget derailment?

As mentioned before when deviation occurs between outturn and budgetary data and decided by the Management Company or any change in the Budgeted items, then it stops there and talk about budget forecast. To forecast is essentially a new budget which includes data from actual results. If for example the March decided to become a new Budget in fact this is the actual results from January to February and the new budget from March onwards. So we are talking about now forecast.

27. What is your methodology of implementing a budget?

First you need a commercial address to give us the expected sales for the next year. Once they interbreed with the financial department, begins building the budget for the piece of revenues. Depending on the expected revenue will be in the second stage of cooperation parts of the Finance Department, the Personnel Division, Directorate General and other departments, so as to determine the plan for next year. For example would be layoffs; This paitei economic cooperation with the Directorate of Personnel Department, under the direction of General. Once we determine the various parameters of growth begins budget, and at the end depending on the result leads to strategic decisions.