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Everyone does budgeting in daily life, it is the planning of how to manage resources and to get maximum from these resources. Without budgeting planning for the functions can not be done. Budget is the standard statement made by company in financial terms, this statement represents the goals and objectives to be achieved by the company. Future projection for profit, cost and expenses can be done through budgeting. Budget could be of short term or of long term depending upon the plans of the company.
Manager could think and formalize his future responsibilities through planning. He could meet his objectives with the objectives of the company by proper planning and by doing this plans of the company could meet with the objectives of the company. Functions of company could be controlled by proper budgeting techniques. Further budget could be divided into the capital budget and the operating budget.
BUDGET IN BUSINESSES
Process of budgeting in businesses includes the activities involve in the analysis making of business plans. High-quality budget considers all dimensions including political, operational and management dimensions. Complex and large companies have lengthy budgeting process. One year could be taken as pre budgeting period for large companies.
Good budget is the one which incorporates long term view of companies, it focuses on results and the outcomes of business operations, it has link with company's overall goal and provide bonuses to the management and employees.
Budget can be made by the top management and then it is implemented on all levels. This approach is called top down budgeting approach. Budget is made by one person and he has responsibility of managing it, he is the one who is accountable for the implementation of budget in proper way. Top management has overall view of entire company so managers can make good and high-quality budget.
Lower level management can also make budget and submit to the upper level management for approval this approach is called bottom up budgeting approach. Goals of different sub units are combined here and budget of each unit combines to form the overall budget of the company.
Budget should be flexible in a way that it could change with the change in goals. If goals of company would change then budget could also be changed easily. Goal accomplishment period should be taken in account while making the budget.
TRADITIONAL BUDGET: Indirect cost is allocated to all services and product in traditional budgeting. Services and products with greater quantity are over costed in traditional budgeting, this budgeting is carried out from past years but this budgeting process is becoming obsolete now. Traditional budgeting does not have concern with the uncertain situations and happening. Traditional budgeting are no longer in companies now they are outsourced because of the fact that budgeting is important in achieving the company's goal.
Activity based budgeting is taking place of traditional budgeting. Problem with traditional budgeting is that it considers the cost as variable and allocates it to the volumes of products but every product contains both fixed and variable costs.
ACTIVITY BASED BUDGETING: Activity based budgeting takes the waste and other non cost expenses in to consideration. Process cost and departmental cost both are calculated and also it focuses on the workload. Activity based budgeting is becoming popular and good method now days. Resources allocation to each activity is decided on the basis of the cost incurred by the activities in different functional departments and then relationships are made between these activities. As name explains this budgeting method gives more importance to activities rather than cost. This method does good future projection and can help in better decision making by management. Activity based budgeting focuses on the activity based costing which tells the real cost occurred in making the particular product.
Activity based budgeting provides the forecasted cost thus helping the management to achieve and maintain that cost. Companies could have better understanding about the cost and expenses and they can learn how to control their cost with the help of activity bases costing and budgeting.
Activity based budgeting emphasizes on the fixed cost rather than variable cost in medium to long term. Managers could easily achieve the goals of the company through this process and can take their company to that point of success where their competitors can not reach. ABB links the budgeting process to the company's strategies and can creates the value for the company.
Advantages of ABB
Activities and costs are accurately related and linked to each other, it is easier to understand, it recommends what amount should be invested on the specific activity, companies control over its costs can be increased, it focuses on the goals of company to be achieved, cost allocation is done in proper and best way through ABB and it links the company's strategic goals and operational activities.
TYPES OF BUSINESS BUDGETS
For making the good budget proper planning should be done, budget is the combination of objectives and goals of the company. Goals and objectives should be clearly defined and linked with the budget. Planning is done before making the goals, what would be the day to day activities that should be completed in order to achieve the objectives and goals are decided here. Control should be maintained to see whether company is meeting its goals or not. Budgets could be of different types:
Operating budgets: operating budgets provide guidance to the daily activities of company. This budget collects the activities of each department and then summarizes the outputs of these activities.
Sales budget: all other scheduled budgets depend on it, it forecasts the sales value in terms of cash. Shows the trend analysis of sales with respect to the past sales of the company.
Production budget: it is basically expressed in unit's term also forecast and project the number of units that has to be made in particular time period.
Support budget: it explains the cost and expense budget for the company. Support budget does calculations for the resources that would be required by the company to perform activities.
Budgeted Income Statement: tells about the sales, cost, expenses and income of the company. Activities have to be forecasted in order to asses the company's activities over specific period and their impact on the company's performance.
Budgeted balance Sheet: gives the summary of the company's financial position. Company requirement for assets, liabilities and equities with in specific time is forecasted here.
Good budget tell what planning methods should be used in order to make the budget more effective and what tools should be used to get the desired outcome. Main function and intentions of the budget is to document the goal of the company. Budget completion is mainly done by people, human processes determine the success and failure of the budget. ABB method should be used to cover the all costs occurring in production process in the company. Activity based budgeting minimizes the cost and maximizes the profit. Activity Base Budgeting is the source to compete with the competitor and remain ahead from it. Budget streamlines the process and activities with in the company and allows the activities to be done in proper sequence and through proper planning.