BUS-091- Budgeting Process- Lesson Script.docx

**BUS-091** **Module 3** **Budgeting process.** There are three basic types of budgets. Capital budgets are the result of capital budgeting. Once a company has gone through capital budgeting, Recall that it\'s the process of determining if assets should be purchased. The capital budget or capital...

**BUS-091** **Module 3** **Budgeting process.** There are three basic types of budgets. Capital budgets are the result of capital budgeting. Once a company has gone through capital budgeting, Recall that it\'s the process of determining if assets should be purchased. The capital budget or capital expenditures budgets themselves schedule the timing of acquisition and the cash outflows related to the project. We also have operating budgets. They consist of cost, revenues, and cash flows related to operations. Financial budgets include pro forma financial statements. Pro forma means what if. So the financial budgets consist of a set of financial statements using the results of budgeted operations. There are several characteristics of budgets which are important. First, they are prepared in advance. They pertain to future accounting periods. A company derives them from a company\'s long term strategy. They are quantified in physical or monetary amounts. And they serve as a benchmark of expected performance. To be effective, they must be realistic. They should also be flexible because economic conditions change. Thank you very much. They should be evaluated regularly and must be clearly communicated to management and other employees. Let\'s look at the planning aspects of budgeting. Budgeting helps managers communicate plans to other levels of management and to the employees. They quantify targets and they determine directions in order to allocate resources. They promote forward thinking. And they turn strategic objectives into reality. They specify a means of achieving the goals. From the controlling aspect of budgeting, budgets help managers aid in measuring performance. They provide direction and help managers coordinate operations. They assign responsibilities and motivate managers to achieve goals. They improve the efficiency and establish targets and standards. What can we budget? We can budget a number of different things, both monetary and non monetary. We can budget amounts in terms of financial amounts, time, acquisition and use of materials, the manufacturing of products, including the number of units to produce, attendance at a football game, or the number of points earned for classes, among others. A budget committee is responsible for approving the various budgets. A budget committee consists of senior managers, the CFO, some vice presidents, such as the vice president of sales, the controller, and often the president of a company. Budget committees do not prepare budgets. There are two budget approaches. A top down approach is when upper level manager pushes down the goals. from top level management. A bottom up approach is much more user friendly. The lower level managers are the primary source of information. They actually provide information in setting the budget amounts. Budget time periods can range from several months or a single month to several years. There\'s an inverse relationship between the length of the budget period and the detail contained within the budget. A short budget period has much detail, whereas a longer budget period is less specific with a lot less detail. There are two forms of specialized budgeting that we\'re going to address. The first is zero based budgeting. It\'s a method of budget preparation where managers must start with zero each budget period and justify every amount that they request on a budget. It\'s used primarily for government, and UNF being a government, a state institution, uses zero based budget appropriately. K Zen budgeting is a Japanese model of budgeting. The Japanese believe that every accounting period, your employees must get a little faster, And your company will become more efficient by using materials more efficiently. It incorporates continuous improvement into each subsequent budget period. Japanese believe cost can always be reduced as time goes by because a company will always become more efficient. Budgets must be successful, so what does that depend upon? It depends upon the degree of support that top management gives the budget. How top manage management uses the budget information. It also is successful based on the timeliness. The more timely a budget is follow up, followed up, the more effective it\'s, there are several problems that result from budgeting. The first is goal incongruence. It occurs when upper level management and lower level managers focus on different goals. It arises from the conflicting goals of managers and employees. Managers have a desire to make their annual performance evaluations look good, and upper level management wants to maximize profits or ROI. And that\'s what creates the difference in making decisions. Thanks. Thanks. Another problem is called budget slack. It\'s also known as padding the budget. It occurs when bottom up budgeting is employed. It allows lower level managers to provide input into budgeted amounts. To avoid the possibility of not meeting the budget target, managers often try to overstate expenses and understate revenue. This makes budget targets a lot easier to achieve. There are more problems resulting from budgeting, and one is called income shifting. It occurs when a manager\'s bonus is tied to meeting or beating budget targets. It causes managers to try to shift revenue or expenses between accounting periods to increase their performance evaluations. Budget variances are The differences between actual results and budgeted amounts. There are three primary variance causes. Managers may have done a very good job or they may have done a very bad job. Business or economic conditions may have changed, similar to the increase in gasoline prices that we experienced a few years ago. The ballot, the budget itself may have resulted from a very weak development, perhaps a lot of research was not put into developing the estimates used for the budgeted amounts. So these are the three items that can call difference, cause differences between budgets and the actual performance. This concludes Chapter 37. Thanks for dropping by, and come back again. This chapter will cover the budgeting process. What is a budget? A budget is a projection of future operations. It can include cost, revenues, cash, receivables, all sorts of different items that a company deals with in operations. It results in the financial position of a company, which is a budgeted balance sheet. There are three basic types of budgets. Capital budgets are the result of capital budgeting. Once a company has gone through capital budgeting, Recall that it\'s the process of determining if assets should be purchased. The capital budget or capital expenditures budgets themselves schedule the timing of acquisition and the cash outflows related to the project. We also have operating budgets. They consist of cost, revenues, and cash flows related to operations. Financial budgets include pro forma financial statements. Pro forma means what if. So the financial budgets consist of a set of financial statements using the results of budgeted operations. There are several characteristics of budgets which are important. First, they are prepared in advance. They pertain to future accounting periods. A company derives them from a company\'s long term strategy. They are quantified in physical or monetary amounts. And they serve as a benchmark of expected performance. To be effective, they must be realistic. They should also be flexible because economic conditions change. Thank you very much. They should be evaluated regularly and must be clearly communicated to management and other employees. Let\'s look at the planning aspects of budgeting. Budgeting helps managers communicate plans to other levels of management and to the employees. They quantify targets and they determine directions in order to allocate resources. They promote forward thinking. And they turn strategic objectives into reality. They specify a means of achieving the goals. From the controlling aspect of budgeting, budgets help managers aid in measuring performance. They provide direction and help managers coordinate operations. They assign responsibilities and motivate managers to achieve goals. They improve the efficiency and establish targets and standards. What can we budget? We can budget a number of different things, both monetary and non monetary. We can budget amounts in terms of financial amounts, time, acquisition and use of materials, the manufacturing of products, including the number of units to produce, attendance at a football game, or the number of points earned for classes, among others. A budget committee is responsible for approving the various budgets. A budget committee consists of senior managers, the CFO, some vice presidents, such as the vice president of sales, the controller, and often the president of a company. Budget committees do not prepare budgets. There are two budget approaches. A top down approach is when upper level manager pushes down the goals. from top level management. A bottom up approach is much more user friendly. The lower level managers are the primary source of information. They actually provide information in setting the budget amounts. Budget time periods can range from several months or a single month to several years. There\'s an inverse relationship between the length of the budget period and the detail contained within the budget. A short budget period has much detail, whereas a longer budget period is less specific with a lot less detail. There are two forms of specialized budgeting that we\'re going to address. The first is zero based budgeting. It\'s a method of budget preparation where managers must start with zero each budget period and justify every amount that they request on a budget. It\'s used primarily for government, and UNF being a government, a state institution, uses zero based budget appropriately. K Zen budgeting is a Japanese model of budgeting. The Japanese believe that every accounting period, your employees must get a little faster, And your company will become more efficient by using materials more efficiently. It incorporates continuous improvement into each subsequent budget period. Japanese believe cost can always be reduced as time goes by because a company will always become more efficient. Budgets must be successful, so what does that depend upon? It depends upon the degree of support that top management gives the budget. How top manage management uses the budget information. It also is successful based on the timeliness. The more timely a budget is follow up, followed up, the more effective it\'s, there are several problems that result from budgeting. The first is goal incongruence. It occurs when upper level management and lower level managers focus on different goals. It arises from the conflicting goals of managers and employees. Managers have a desire to make their annual performance evaluations look good, and upper level management wants to maximize profits or ROI. And that\'s what creates the difference in making decisions. Thanks. Thanks. Another problem is called budget slack. It\'s also known as padding the budget. It occurs when bottom up budgeting is employed. It allows lower level managers to provide input into budgeted amounts. To avoid the possibility of not meeting the budget target, managers often try to overstate expenses and understate revenue. This makes budget targets a lot easier to achieve. There are more problems resulting from budgeting, and one is called income shifting. It occurs when a manager\'s bonus is tied to meeting or beating budget targets. It causes managers to try to shift revenue or expenses between accounting periods to increase their performance evaluations. Budget variances are The differences between actual results and budgeted amounts. There are three primary variance causes. Managers may have done a very good job or they may have done a very bad job. Business or economic conditions may have changed, similar to the increase in gasoline prices that we experienced a few years ago. The ballot, the budget itself may have resulted from a very weak development, perhaps a lot of research was not put into developing the estimates used for the budgeted amounts. So these are the three items that can call difference, cause differences between budgets and the actual performance.