OPERATING BUDGET

Operating Budget

Operating Budget

Budgeting

A Budget is a plan expressed in financial terms.

C.I.M.A. defines a budget as 'A plan quantified in monetary terms, prepared prior to a defined period of time to attain a given objective, a budget is normally for a relatively short period, e.g. 1 year.

Purposes of Budgeting

A number of purposes of budgeting have been identified. They include:

Planning

Resource Allocation

Co-ordination

Control

Communication

Motivation

Performance Evaluation

Budgetary Control

This is a system which uses budgets as a means of controlling the activities of the organization. It has three main aspects:-

Planning.

Co-ordination.

Control.

Planning

Budgetary planning is the process of preparing detailed, short-term plans for all the functions, departments and activities of the organization. It is important that the short-term plans and objectives that make up the budget are related to the long-term plan and objectives of the organization. The budget may be drawn up by preparing an overall budget for the organization which is then broken down into more detailed budgets for the different parts of the organization [the top-down approach] or by devising budgets for the various parts of the organization and then bringing them together to build up the overall budget the bottom up approach.

Extrapolations, Forecasts and Plans

In discussing budgetary planning it is important to distinguish between extrapolations, forecasts and plans. An extrapolation is the continued projection of an existing trend. A forecast will be based on an extrapolation, but is adjusted to take account of any known factors which will affect the trend.

A plan involves some intervention by the organization in order to modify events in such a way as to make it more likely that the organization's objectives will be achieved.

Co-ordination

It is vital that the plans of each department are related to each other and are integrated together to make a coherent whole e.g. it is no use planning for sales of 150,000 units if productive capacity is restricted to 120,000 units. Note the significance in this context of limiting factors and the principal budget factor.

The principal budget factor is the factor which acts as an over-riding limitation on the activities of the organization. It might be sales, productive capacity, and finance, shortages of materials, labor or energy. The principal budget factor can change over time. Identifying limiting factors is a key element in the co-ordination aspect of budgetary control.

The Master Budget

This is the overall plan for the business's financial activities, to which, therefore, its sectional plans must be related. For commercial organizations it will be normally in ...