Types Of Budget As Planning And Control Tools
The success of a company depends on several things, good strategy, business plan, and budget, among others. Budget is an important part in order for a business to function and succeed. According to Business Dictionary, budget is “an estimate of costs, revenues, and resources over a specified period” (Business Dictionary, 2016). A budget is a plan for the financial conditions of a company’s next period.
There are different types of budgets in managerial accounting. Some of those budgets are master budget, cash budget, sales budget, production budget, etc. The purpose of these budgets is planning and control. Preparing a budget helps business to plan goals and to achieve them and it also helps control …show more content…
Planning is what helps business develop goals and determine if the company has the necessary capital to achieve those goals. There are several steps companies must follow when creating a budget for the next period:
Getting the right people involved
The first step when creating a budget is to get the right people involved during the process. Harton (1954), in his article “Program planning and control through the budgetary process”, explains that because of the structure of the business, where a single company consists of several departments, “creating a budget requires coordination between all different departments” (p.424).
Rotondi (1997) on “Create a budget that works for you” says that is crucial to involve the right people when creating the budget. “Companies should share the responsibility for the budget and allow the departments responsible own their budget” (p. 47).
Prepare your …show more content…
There are several reasons why companies like UTC Aerospace Systems choose to use budget report. The three main reasons are planning, control, and evaluation of performance. Planning helps the companies set up their targets and how much money the department can spend to achieve those goals. Knowing how much capital a department has to spend on a project helps managers to communicate the priorities for the period.
Another way to use a budget is to control expenditures on the different tasks and projects for the specific period. Using budget as a controlling tool helps monitor company’s expenses and revenues. However, the budget should not be too restricted. Companies should be prepared for emergency expenses.
Measure or evaluation of performance is another important reason why companies use budget. When companies compare their estimated budget to their actuals, these numbers could represent how efficient the ongoing period has been. Companies can determine if they have spent more or less than expected during the period or if they have achieved the expected revenue.
Why companies do not use a budget