How to Prepare a Sales BudgetAccounting provides the starting point of budgeting by providing historical data on revenues, costs, and expenses. An accountant becomes the translator of the budget and communicates the budget to all areas of responsibility. Accountants also prepare periodic budget reports that compare actual results with planned objectives and provide a basis for evaluating performance.starts with the assumption that all department budgets are zero and must be rebuilt from scratch. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up budgeting can be a highly effective way to “shake things up”. Accounting information makes major contributions to the budgeting process.
Chapter 9: Budgeting Planning
What incentive do managers have to create budgetary slack?
Causes of Budgetary Slack The managers of a company may face a lot of uncertainty over the results expected in a future period. Budgetary slack may occur when the managers underestimate the expected revenues to remain in a range that is easy to achieve for a new product line.The potential benefits of this approach are lower-level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower-level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack.A company may choose this method because they believe top management should set the direction and financial targets for the business. It is then the lower-level managers’ task to figure out the best way to implement those plans with the resources allocated to their department. Suppose a company making construction equipment implements a zero-based budgeting process calling for closer scrutiny of manufacturing department expenses. The company notices that the cost of certain parts used in its final products and outsourced to another manufacturer increases by 5% every year. The company has the capability to make those parts in-house using its own workers.Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with a few functional areas reviewed at a time by managers or group leaders. Zero-based budgeting can help lower costs by avoiding blanket increases or decreases to a prior period’s budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production, as their contributions are more easily justifiable than in departments such as client service and research and development.
Why does budgetary slack occur?
Budgetary slack is the deliberate under-estimation of budgeted revenue or over-estimation of budgeted expenses. This allows managers a much better chance of “making their numbers,” which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers.
Negative Side of Budgetary SlackÂ
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.
By following these zero-based budgeting steps, you will determine what expenses go toward achieving business goals that directly benefit your company. Budgeting provides a model of the potential financial performance of a business, given that specific strategies and plans are followed.The greatest advantage of top-down budgeting is that the overall business plan ties to senior management’s objectives and that management determines that the appropriate resources are utilized to meet those objectives. Top-down budgets also tend to focus management’s attention on efficiency, since they receive a total and must figure out how to achieve their department’s business objectives within that amount.
AccountingTools
Traditional budgeting analyzes only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses, and aims to drive value for an organization by optimizing costs and not just revenue.
- A company may choose this method because they believe top management should set the direction and financial targets for the business.
- Suppose a company making construction equipment implements a zero-based budgeting process calling for closer scrutiny of manufacturing department expenses.
- It is then the lower-level managers’ task to figure out the best way to implement those plans with the resources allocated to their department.
Problems caused by budgeting
Top -down budgeting is seen as an efficient method, since managers are required to focus on meeting objectives when given a specific amount. One disadvantage of top-down budgeting is that top management may not be aware of the details of what it will take to implement their high-level plans.To manage a business effectively, expenditure must be properly controlled. An example of how budgeting plays a role in decision making is when spending money on advertising. When the budget allocated for this aspect has been completely used, the decision is likely to stop spending money on it.In top-down budgeting, a company’s high-level targets and goals are defined by senior management, and then managers are given an allocation from those targets. In this lesson, we’ll discuss why companies use this method and how the process works. Traditional budgeting calls for incremental increases over previous budgets, such as a 2% increase in spending, as opposed to a justification of both old and new expenses, as called for with zero-based budgeting.
Causes of Budgetary Slack
Top-down budgeting is a budgeting method in which senior management develops a high-level budget for the company. Once the top-level numbers are created, amounts are allocated to individual functions or departments that must create a detailed budget with their allocation. Both zero-based and traditional budgeting are important in creating departmental budgets. If you have managers of different departments, you might allocate funds to them for the year.Budgeting also helps measure the forecast business performance against the actual business performance. It allows a business owner or manager to determine whether the business lives up to expectations through differences between budgeted and actual expenditure. A specific budget provides information on how much a business can spend every month. Moreover, it lets a business owner know how much profit to make to meet all expenses.
Disadvantages of Budgetary Slack
After weighing the positives and negatives of in-house manufacturing, the company finds it can make the parts more cheaply than the outside supplier. Top-down budgeting refers to a budgeting method where senior management prepares a high-level budget for the company. The company’s senior management prepares the budget based on its objectives and then passes it on to department managers for implementation.
Meaning and Definition of Budgetary Slack
With traditional budgeting, managers are encouraged to spend their allowance so they don’t lose it. Zero-based budgeting is a little more frugal, and you might not see unnecessary spending, since every expense is accounted for.Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one. Imposed budgeting is a top-down process where executives adhere to a goal that they set for the company. Managers follow the goals and impose budget targets for activities and costs. It can be effective if a company is in a turnaround situation where they need to meet some difficult goals, but there might be very little goal congruence.
