Learning Unit 9 :The

budgeting process

CHAPTER 13
Learning Objectives
• Explain how budgeting fits into the overall planning and
control framework;
• Identify and describe the six different purposes of
budgeting;
• Identify and describe the various stages in the budget
process;
• Prepare functional and master budgets;
• Describe the criticisms relating to traditional budgeting.

Sydney York
HOMEWORK  Big Manufacturing Ltd Mr Dhoni
QC Ltd
Strategic planning, budgeting and control process
Why do we produce budgets?

1. To aid the planning of actual operations:

2. To co-ordinate the activities of the organization

3. To communicate plans to various responsibility centre

managers

4. To motivate managers to strive to achieve the budget

goals

5. To control activities

6. To evaluate the performance of managers

Stages in the budgeting process

1.Communicate details of budget policy and guidelines

2. Determine the factor that restricts output.

3. Preparation of the sales budget.

4. Initial preparation of budgets.

5. Negotiation of budgets with higher management. (See figure on slide 4.)

6. Coordination and review of budgets.

7. Final acceptance of budgets.

8. Ongoing review of the budgets.

Criticisms of budgeting

 Encourages rigid planning and incremental thinking;

 Very time-consuming;
 Produce inadequate variance reports leaving the ‘how’ and
‘why’ questions unanswered;
 Ignores key drivers of shareholder value by focusing too much
attention on short-term financial numbers;
 Represents a yearly rigid ritual (decreases flexibility);
 Commits the company to a 12 month period, which can be risky if
budgets are based on uncertain forecasts;
 Often based on only the lowest targets rather than attempting to
beat the targets;
 Encourages spending what is in the budget even if this is not
necessary (prevent next year’s budget being reduced);
 Focus on achieving the budget even if this results in undesirable
actions