BUDGET CONCEPT

Advantages of Budgets
1. Promote coordination and communication among
organization units and activities
2. Provide a framework for measuring performance
3. Provide motivation for managers and employees to achieve
the companys plans
4. Promote the efficient allocation of organizational resources
5. Provide a means for controlling operations
6. Provide a means to check on progress toward the
organizations goals
Constraint exists when one or more of the factors of production
are limited in some way
Controls refers generally to the set of procedures, tools and
systems that a company uses to ensure that progress is being made
toward accomplishing its goals and objectives
Methods of Developing the Budget
1. Participative budget bottom up; negotiation between
lower-level managers and senior managers
Advantages
Good communication device
More likely to gain employee commitment to fulfill
budgetary goals
More likely to be achievable
Disadvantages
Budgetary slack
Integrating corporate strategic plans into the budget
can be more difficult
Time consuming

2.

Authoritative budget top down; Senior management

prepares all the budget from every segment of the
organization
Advantages
Gives senior management better control over the
decision-making process
Places more emphasis on the achievement of the
strategic plans
Budget development can be done more rapidly and
with greater flexibility
No budgetary slack
Disadvantages
Lower-level managers and employees are usually
have less commitment to the budget and be less
acceptable of it
An authoritative budget issues, or dictates, orders
Objectives may not be practical or possible to achieve
Communication between senior management and
lower-level management and employees is reduced
with an authoritative budgeting process
3. Consultative budget combination of participative and
authoritative budget development methods; senior
management asks for input from lower-level managers but
then develops the budget with no joint decision-making or
negotiation involved
Goal Congruence aligning the goals of two or more groups
Budgetary Slack the difference between the amount budgeted and
the amount the manager actually expects (underestimating planned
revenue, overestimating planned costs)
Controllable Costs refers to costs for which the manager has the
authority to make the decisions about how money will be spent
Non-controllable Costs refers to costs that are ordinarily
controlled at a higher level in the organization