386 Accounting: Business Reporting for Decision Making
- forecasting data such as sales or fees, which commonly set the level of activity for the budget period
- helping determine required inventory levels and purchasing requirements for raw materials
- planning labour and other inputs
- determining the ability of the entity to meet financing commitments.
Budgeting can assist in deciding on required inventory levels.
The budgeting process
The budgeting process will commonly involve a series of steps, including:
- consideration of past performance
- assessment of the expected trading and operating conditions
- preparation of initial budget estimates
- adjustment to estimates based on communication with, and feedback from, managers
- preparation of the budgeted reports and any sub-budgets
- monitoring of actual performance against the budget over the budget period
- making any necessary adjustments to the budget during the budget period.
Throughout the process, communication with managers who are affected by the budgets should occur.
These managers are commonly responsible for a segment of the entity, such as a division, a department
or a branch. These segments may be referred to as responsibility centres, and may form part of the entity
structure. The level of communication in the budgeting process will vary from entity to entity, as will the
level of participation sought from managers of responsibility centres in the budgeting process. For many
entities, the annual budget process may take up to nine months of the year before the budget is final-
ised. In larger entities, there will be a budget committee that coordinates the preparation of the budget.
Committee membership will include the managing director, treasurer, chief accountant, and management
personnel from each of the major areas of the company, such as sales, production and research.