What is the operational purpose of a budget? Who should be involved in the budgeting process and why? How does the correct identification of cost behavior (i. e. fixed, variable, and mixed) impact the accuracy of the budget? Who should be held responsible for budget variances? How should budget variances be researched and explained?
The budget is a financial document which aims at identifying and explaining the cost of the project in details. In addition to this, it also serves the purpose of identifying the extent to which the organization is being managed well. If a budget has been poorly prepared, several questions and ambiguities are raised towards the capacity of the organization in managing the funds (Edmunds and Tsay et al., 2011). The budget helps in keeping a track of the incoming and the outgoing money. In other words, budgeting refers to the expression of the plans of business in terms of finances. The process of budgeting requires closer coordination of the financial plans made for all the business areas.
In order to be successful in budgeting, the people need to be managed and not the spreadsheets. The budget is actually about the people management; owner has the authority and power to spend while the management believes in the budget and then implement it. It must be ensured that all the people involved in the process must know the results and willing to implement (Barringer, 2010). The employees of the business are given their goals to be achieved through the budgets and so employees should be involved by giving them proper training. The three key purposes of budgeting in business are to make plans, to control the expenses and cash flows; and to evaluate the performance of the organization and its employees (Frow and Marginson et al., 2010).
Accurate information regarding the cost behavior is vital for the management to make effective decisions; the management and the owners must be updated with the cost behavior so that they are aware of how any change in the activities can affect the cost (Frow and Marginson et al., 2010). This information is critical to plan ahead for the organization and make budget for its operations. If the goals and targets set by the manager had been achievable and reasonable; the responsibility rests on the manager for the variance (Edmunds and Tsay et al., 2011). But if the goals have been imposed by the seniors and were unrealistic then it’s not the manager’s fault.
A budget variance report must be prepared from the general ledger; if expenses exceed budget, unfavorable variance exists otherwise a favorable. In order to explain the variance, managers need to report the variance and the percentage both. An explanation should also accompany like the change in volume, or an unexpected increase in price etc. (Barringer, 2010). It is highly critical for the manager to prepare a details and accurate explanation so that the administration believes in the credibility of the report.
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Barringer, B. (2010). Managing Your Own Business’ Finances. New York: Financial Times Press.
Edmunds, T., Tsay, B. and R. Olds, P. (2011). Fundamental Managerial Accounting Concepts. 6th ed. New York: McGraw-Hill Irwin.
Frow, N., Marginson, D. and Ogden, S. (2010). “ Continuous” budgeting: Reconciling budget flexibility with budgetary control. Accounting, Organizations and Society, 35 (4), pp. 444–461.