Time frames for Budgets

May be prepared for a set period of time most commonly for one year Annual budget is subdivided budget Long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations into monthly and quarterly

Short enough for reliable estimates

When Budget is prepared for the same time period as is covered by a companys fiscal year*. budget preparation is

easier and comparisons between actual results and budgeted

results are facilitated

CONTINUOUS BUDGET/ROLLING BUDGET

 Budget continuously updated by adding a further accounting period (month or quarter) when the earliest accounting period has expired Rolling budgets as defined by CIMA Official Terminology
A rolling budget is a twelve month budget which is prepared several times each year (say once each quarter). The purpose of a rolling budget is to give management the chance to revise its plans, but more importantly, to make more accurate forecasts and plans for the next few months.

Rolling budgets
Advantages Disadvantages Budgets are reassessed Rolling budgets are time regularly and thus should be consuming and expensive as a more realistic and accurate. number of budgets must be produced during the year. Because rolling budgets are revised regularly, uncertainty The volume of work required is reduced. with each reassessment of the budget can be off-putting for Planning and control is based managers. on a recent updated plan. Each revised budget may The budget is continuous and require revision of standards will always extend a number or stock valuations which is of months ahead. time consuming.

Example
Lets assume that a companys accounting year ends on each December 31. Prior to the start of the year 2011, the company prepares its annual budget which is detailed by month for January through December 2011. This budget could become a rolling budget if after January 2011 the company drops the budget for January 2011 and adds the budget for January 2012. This rolling budget now covers the one year, or 12-month,

period of February 1, 2011 through January 31, 2012. At the end of

February 2011, the rolling budget will drop February 2011 and will add February 2012. At this point the rolling budget will cover the one year period of March 1, 2011 through February 29, 2012.

BUDGET DEVELOPMENT PROCESS

Budget guidelines are set and communicated

Use of the variance reports

Budget proposals prepared by responsibility centre's

Reporting on variance

Negotiation, review and approval

Revisions

PARTICIPANTS IN THE BUDGETING PROCESS

PARTICIPATIVE BUDGETS: The bottom-up participative approach is driven by involving lower-level employees in the budget development process. The budget is prepared by those who have the best knowledge of their own specific areas of operation. Top management initiate the budget process with general budget guidelines, but it is the lower-level units that drive the

development of budgets for their units.

 Eventually top management and the budget committee will receive the overall plan. The budget committee must then review the budget components

for consistency and coordination.

The participative budget helps in improving the employee morale and job satisfaction. .

On the negative side of, a bottom-up approach is generally more

time consuming and expensive to develop and administer. May result in budgetary slack

MANDATED BUDGETS: These budgets will begin with upper level management establishing parameters under which the budget is to be prepared. These parameters can be general or specific.

Lower-level personnel have very little input in setting the overall goals of the organization.
One disadvantage of the top-down approach is that lower-level managers may view the budget as a dictatorial standard. On the positive side, top-down budgets can set a tone for the organization..

Budgeting Best Practices for Tough Economic Times

 As businesses face growing demands to control costs, managers at

all levels need better budgeting skills. Most managers have not been trained on how to prepare a business budget. The fast pace of economic change, the potential for cut backs and the complexities of the marketplace make developing effective budgets both more difficult and more important than ever before.

Bad Budgeting Can Kill Your Company

 Poor department budgeting spread across an organization can be disastrous. In a boom there is enough fat to absorb some bad judgment; in todays economy good budget management becomes a survival issue.
Important benefits of improving the budgeting process include: i. ii. iii. iv. Better companywide understanding of strategic goals More coordinated support for company goals More realistic budgets Improved ability to respond quickly to competition and market changes

BEST PRACTICES GUIDELINES FOR BUDGETING

Implementing budgeting best practices is essential to meeting the strategic goals and objectives of the organization. The following are key budget issues and best practices for every organization:

1. Linking the development of the budget to corporate strategy.

The budget expresses how resources will be allocated and how progress will be measure. When the budget is linked to corporate strategy, all managers and employees have a clearer understanding of strategic goals. This leads to greater support for goals, better coordination of efforts, and, ultimately, to stronger companywide performance

2. Extensive communication
Management must communicate strategic objectives to all levels. Management need to collect information's from external sources and from its customers to develop a effective budget.

3. Develop procedures to allocate resources strategically.

Competition for resources is inevitable. Every business unit needs funding for both capital and operating expenses. Because needs typically exceed actual resources available, resources must be allocated to support key strategies. While it is often said that resource allocation is part science, part art, applying best practices can leads to better results.

One such practice is to give managers insight into the ways in which changes in one budget affect the other. It is also important to develop measures such as the company's weighted average cost of capital and the degree of risk involved in competing plans of action, the costs or advantages associated with deferring action, as well as factors such as expected developments in interest rates. By monitoring the results of allocation efforts, companies can refine and improve their procedures.

4. Managers are evaluated on performance measures other than meeting budget targets.
Meeting budget targets secondary to other performance measures. Business unit managers should be evaluated on the basis of other performance measures also. 5. Linking cost management efforts to budgeting Make meeting budget targets secondary to other performance measures. Business unit managers should be involved in identifying the measures that are most relevant for their operations.

6. Strategic use of variance analysis Strategic use of variance analysis helps to identify their weakness and identify the areas to be improved. Attention is given to those variances that have a significant impact on profitability.
7.Reduced complexity and budget cycle time. Strive to reduce budget complexity and streamline budgeting procedures by making certain all people with budget responsibilities understand the budget process. This allows management to collect budget information, make allocation decisions, and communicate final targets in less time, at lower cost.

7.Reduced complexity and budget cycle time. Strive to reduce budget complexity by making certain all people with budget responsibilities understand the budget process. This allows management to collect budget information, make allocation decisions, and communicate final targets in less time, at lower cost, and with less disruption to the company's core activities. 8. Developing budgets that can be revised if necessary Budgets that accommodate change help companies respond to competitive threats or opportunities more quickly and with greater precision. 9. Reviewing the budget on a regular basis throughout the year.

Budgetary slack & goal Congruence

 Budgetary slack is the difference between the budgeted performance and the performance that is actually expected. It is the practice of underestimating budgeted revenues and overestimating budgeted costs to make the overall budgeted profit more achievable.
Budgetary slacks misrepresents the true profit potential of the and can lead to inefficient resource allocation and poor coordination of activities within the company

 Goal congruence is defined as aligning the goals of two or more groups. As used in planning and budgeting, it refers to the aligning of goals of the individual managers with the goals of the organization as a whole. There is a hazard in the budgeting process if managers performance will be evaluated based upon budget achievement. Managers who develop the budgets that they are going to be accountable to meet may build budgetary slack into their budgets in order to make sure their budgets are achievable..

Explain how controllability relates to responsibility accounting.

Budgeting Process The Role of the Responsibility Centers

Prepare the budget compatible with organizational goals.

Communicate with other units and validate units numbers.

Dont be optimistic but do not be pessimistic to show achievement of budget targets.

Remember that eventually, responsibility center budgets are subject to approval by senior managers and analysts, and are subject to revisions.
The preparation of reports for each level of responsibility in the companys organization chart

Budget Responsibilities

RESPONSIBILITY CENTERS
A part, segment, or subunit of an organization whose manager is accountable for a specified set of activities There are FOUR responsibility centers. They are :i. Cost Center ii. Revenue Center iii.Profit Center iv.Investment Center Responsibility Accounting A system that measures the plans, budgets, actions, and actual results of each Responsibility Center Managers of responsibility centers should have direct input into the process of establishing budget goals of their area of responsibility.

What is Controllability?
It is the degree of influence that a specific manager has over costs, revenues, or other items in question.

A controllable cost is any cost that is primarily subject to the influence of a given responsibility center manager for a given time period.

Controllability
Responsibility accounting focuses on information and knowledge, not control.

A responsibility accounting system could exclude all uncontrollable costs from a managers performance report.

In practice, controllability is difficult to pinpoint.

Thank You