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A budget communicates a unit's values and priorities. Therefore, resource use should be associated with a unit's calculated plan. Knack, staff, students, and the campus administration may use the budget to determine whether resources are being properly and constructively used to attain the department's declared mission and objectives.
The budget is the statistical representation of an action plan for a particular time period. It expresses in dollars the action plan's future human and objects resource needs. Identified in the budget are the sources of funds (namely, revenue), such as tuition, endowment income, grants and contracts, and state appropriations, along with their planned uses (namely, expenses), such as salaries, benefits, supplies, and travel. A budget should be flexible enough to enable a unit to take advantage of unpredicted opportunities and survive the shock of unexpected fluctuations in planned resources.
Budgeting is the process of matching considered uses to available resources. The groundwork of a budget consists of estimates of the resources needed to deliver services and the costs of those resources. For example, in an academic department, student request expressed either in credit hours or head count enrollments will settle on
(1) The number of faculty and staff needed to deliver instructional services,
(2) The courses taught,
(3) The number of course sections required, and
(4) The classroom and laboratory facilities required.
At a higher education institution in which research is a focus, faculty time and, therefore, cost must be allocated to research, along with the resources required to maintain research, such as graduate student financial support and corresponding grant support.
An academic department's budget may include support for open uses, such as instruction, as well as support for restricted uses, such as grants, contracts, and endowed scholarships. Resources whose use is limited by either a benefactor or an outside organization can only be budgeted and used for the specific purpose. Even though indefinite resources provide the maximum flexibility, contractual commitments to faculty and staff can bound the ability to shift even those resources from one use to another.
During the year, the budget is a tool for monitoring and controlling the generation and use of resources. By comparing authentic results with the budget plan, mid-course adjustments can be made as desired. The budget also provides the bases for the next year's budget and, as such, is a important tool for evaluating the accurateness of setting up assumptions
4.1.1 Methods adopt to setup Budget
There are two methods commonly used to setup Financial Budgeting Spreadsheets. There are two methods "Bottom up Budget' and "Top down Budget" are adopted. Both methods provide the same objective to produce a precise Financial Budgeting Spreadsheets.
4.1.2 Bottom up Budget
In the "Bottom Up budget" method, the corporation let the all the managers of departments to come up with their own budgeting spreadsheet justified by formulae, researches and strategy. The organizations will do the first review of the spreadsheets. Once they have finalized, the spreadsheets will be submitted to the Financial Planning Unit for further evaluation. During this evaluation process, the budget statistics will be fine tuned. During this assessment stage, it is quite common for the spreadsheets to flow in and out between the particular Departments and Financial Planning Unit.
Once the Financial Planning Unit finalized the spreadsheets, it will be submitted to the Board of Directors (BODs) for final review and final approval. During the review by BODs, there may still be spreadsheets flow to and backward to the BODs. But the frequency of these would be very much reduced at this stage. Once the BODs finalized the budget figures, the financial budgeting spreadsheets will be final and ready to be implemented by the respective departments.
4.1.3 Top down Budget
In the "Top Down budget', the Financial Planning Unit uses the historical reports such as Balance Sheets and Profit and Loss Statements, to comes up with preliminary budgeting spreadsheets. The Financial Planning Unit will hold a meeting with all the BODs and HODs and presents the preliminary spreadsheets to all. During this meeting, the spreadsheets will be discussed and fine tuned to the satisfaction of the meeting. Once the meeting finalized, the spreadsheets will be circulated to the respective departments for implementation and to draw up plans to achieve budget figures.
4.1.4 Pro and Con
Both the above methods have their pro and con. The "Bottom up Budget" is slow but the budgeting spreadsheets tend to be more accurate as all levels of the company staff, from bottom to top, are involved in the preparation of the budget numbers.
The "Top down Budget" is faster but the budgeting spreadsheets are less accurate as the budget numbers are decided at top level meeting and the participation of lower level staff are limited. The impact of this less accuracy can be minimized by applying some financial analytical ratios and formulae to fine tune the final budgeting spreadsheets.
4.2 Budgeting Techniques
When an organization prepares budgets it used many techniques to make budget effective, efficient and long term beneficial. To prepare budget normally organizations used many techniques some of which are here under;
Zero based budgeting.
Budgets in which the statistics are based on those of the real expenditure for the previous year, with a proportion added for an inflationary upward trend for the New Year. This is an easy method that saves time but it is the "lazy" way and is often inaccurate. This budgeting technique is only suitable for organizations where each year is very similar to the previous one in terms of activities. Very few dynamic organizations or projects are so stable that this budgeting technique really works for them.
Zero based budgeting
In zero based budgets, past figures are not used as the starting point. The budgeting process starts from "scratch" with the proposed activities for the year. The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this way. This technique is essential for new organizations and projects, but it is also probably the best route to go in a dynamic organization that is proactive in taking on new challenges.
4.3 Cost Estimation
Rough calculate of the cost of product, plan, or project, computed on the basis of available information. Four common types of cost estimates are: (1) Planning estimate: rough calculation of cost within a sound range of values, prepared for information purposes only. Also called ball park estimate, (2) Budget estimate: rough calculation based on precise (but preliminary) cost data and recognized basics (3) Firm estimate: based on cost data is enough to enter into binding an agreement. (4) Not-to-exceed /Not-less-than estimate: maximum or minimum total required to realize a given task, based on firm cost estimation.
4.3.1 Cost estimation techniques
There are many cost types that are incurred during the process of business. The types of costs which are three in number are explained here under,
"Variable Costs are those costs related with manufacturing that changes directly with the quantity of production, e.g., the direct material or labor necessary to accomplish the make or development of a product".
A fixed cost is the converse and it does not change dependence of production or sales on the total. E.g. lease or hire costs of the building that the company uses are a fixed cost. Mixed costs are a combination of fixed and variable costs because they "consist of a fixed component and a variable component" (Accounting Coach, 2006). Costs must be estimated for proper decision making because improper decisions can be made. There are three main methods used to estimate costs: high-low method, visual fit, and least square regression. "Use of the high-low method requires the use of only two past data observations: the highest level of activity (such as the number of units produced during a time period) and the associated total production cost incurred at that level, and the lowest level of activity and its associated cost".
The visual fit method or "scatter-graph method requires that all recent, normal data observations be plotted on a cost (Y-axis) versus activity (X-axis) graph". A line is then drawn that is a best fit for the data points. When the line is extended to cross the Y-axis, there is a "fairly accurate estimate of fixed costs for the period". The slope can also be calculated to give another reasonably accurate estimate of the variable cost per product.
4.4 Fixed and Flexible Budget
Fixed Budget is mainly used in the planning stage to define the broad objectives of management. Flexible budget, on the other hand is prepared for the volume of activity actually achieved, in other words the controlling stage. The reason why we had flexible budget is because for most of the time, the level of activities differ and as a result, the fixed budget differs by a lot from the actual result. For instance, in an event when the actual production doubled as compared to fixed budget, the variable cost for the production also doubled and the difference between the variable cost differed by a lot.