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It is the process in which designing, implementation and operations of budget take place. The main emphasis of budgeting is on short-term budgeting that involves the provision of resources to support plans that are being implemented.
In this process, annual budgets are being prepared. These budgets differ from organization to organization. Budgeting process may be formal in some organizations where as it may be informal in others.
Budgeting Process does include eight steps given hereunder:
1) Determination of Organization’s objectives and policies that are being reflected in budget. It is therefore necessary to understand, specify and documentation of organizational objectives.
2) Determination of key success factors that will have great influence on organization and its profitability.
3) To establish clear lines of authority and responsibility of managers that are responsible for accomplishment of organizational objectives.
4) To establish budget centers through which separate budgets are prepared and on which control can be exercised.
5) To determine budget period. It may be long-term or short-term budget. Short-term is for a period of one year or less whereas long term is for five or more years.
6) Establish budget committee that will make it possible for satisfactory formulation and implementation of budget.
7) To appoint budget controller who will be administrator to entire budgeting process and is responsible for budget preparation and coordinating activities of related departments.
8) To prepare budget manual in which proper documentation of policies and procedures is involved.
Preparation of master budget along with its various segments required careful management consideration relating to key decisions such as pricing, product scheduling, research and development, product lines, capital expenditures and others. Before the final approval of a budget, it is reviewed several times.
First of all, long-term goals are being formulated by the organization, this step may also be known as strategic planning. Budget is therefore like a car that will help the organization to meet its goals.
Master budget does include the following components:
a) Sales Budget.
b) Production Budget.
c) Direct Material Purchased Budget.
d) Direct Material Usage Budget.
e) Direct Labor Budget.
f) Factory Overhead Budget.
g) Finished Goods and Ending Inventories Budget.
h) Cost of Goods Sold Budget.
i) Marketing Expense Budget.
j) Administrative Expense Budget.
k) Research and Development Expense Budget.
l) Budgeted Income Statement.
m) Capital Budgeting.
n) Cash Budget.
o) Budgeted Balance Sheet.
p) Budgeted Statement of Cash Flows.
Zero Based Budgeting:
In this method of budgeting every time budget is formulated, it is re-evaluated. It requires manager to justify the resources that are being allocated to all activities and projects related to budget. In this approach, cost increments are compared with increments of benefit, resulting in maximum benefit for a given budgeted cost.
Fixed Budgets are those budgets that remain fixed for such period of time for which they are being drafted. Fixed is in the sense that they doesn’t allow any variations in any activity at any time during the relative period. Even if there is a vast change in business activity they still remain fixed.
Flexible budgets are those that may vary as a result of any change in any business activity. These are basically opposite to that of fixed budgets. If there is any increase or decrease in business activity flexible budgets may also change according to the situation.
Activity Based Budgeting:
Activity based budgets are those budgets in which we first determine the planned volumes of the product, its relative cost driver and expected per unit cost of driver. After that budgets are being prepared by multiplying all these. These budgets can be used for planning and control.
Rolling / Continuous Budgets:
Conventionally, budgets are being prepared in advance so that budgeted figures are released to managers before the new budget year starts. It means that for the upcoming year that is going to be start in January, we have to start preparation of its relative budget in august or September this year.
Program Planning and Budget System:
This approach is also known as output budgeting. It has been introduced into non commercial organizations to enable them to make more informed decisions about resource allocation. In this system, expenditures are being analyzed with reference to particular objectives.
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