14 Budgeting............................................
Anthony and Govindarajan (2000) described budgets as ‘an important tool for
effective short-term planning and control’ (p. 360). They saw strategic planning
(see Chapter 12) as being focused on several years, contrasted to budgeting that
focuses on a single year. Strategic planning:
precedes budgeting and provides the framework within which the annual
budget is developed. A budget is, in a sense, a one-year slice of the organi-
zation’s strategic plan. (p. 361)Anthony and Govindarajan also differentiated the strategic plan from the budget,
on the basis that strategy is concerned with product lines while budgets are
concerned with responsibility centres. This is an important distinction, as although
there is no reason that profit reports for products/services cannot be produced
(they tend to stop at the contribution margin level, perhaps because of the
overhead allocation problem described in Chapter 11), traditional management
accounting reports are produced for responsibility centres and used for divisional
performance evaluation, as described in Chapter 13.
What is budgeting?
Abudgetis a plan expressed in monetary terms covering a future time period
(typically a year broken down into months). Budgets are based on a defined level
of activity, either expected sales revenue (if market demand is the limiting factor)
or capacity (if that is the limiting factor). While budgets are typically produced
annually,rolling budgetsadd additional months to the end of the period so
that there is always a 12-month budget for the business. Alternatively, budgets
may be re-forecast part way through a year, e.g. quarterly or six-monthly, to take
into account changes since the last budget cycle (hence the common distinction
made by organizations between budget and forecast. Aforecastusually refers to
a revised estimate, or a budgetary update, part-way through the budget period.)
Budgeting provides the ability to:
žimplement strategy by allocating resources in line with strategic goals;
žco-ordinate activities and assist in communication between different parts of
the organization;