A budget refers to an enumerated financial plan that is meant to be of use in an upcoming accounting period. It also refers to a significant perception in microeconomics which uses a line known as a budget line to give illustration on trade-offs between various goods. A budget is in other words a statement used in an organization and is stated in fiscal terms. Many organizations use budgets because they help in planning financial issues making it easier for the union to plan all issues regarding finance. In all organizations dealing with finance, it is the money that helps it to plan all activities to do with finance in order to do away with anything that may lead to dissolution of the organization or may make the organization to experience losses instead of profits as expected. Money in organizations is also needed in order for purchase of items required for production or for purchase directly by the customers. For the organization to acquire these materials and products, money is the essential factor. It gives a clear impression that for any organization to run money has to be readily available.
In general, a budget is meant to establish the charge for an operation to be undertaken in an organization or products and materials to be acquired. It is also meant for the provision of forecast of expenditures and revenues which involves constructing a model of how the organization in question would carry out its financial activities if certain strategies are implemented. A budget also helps in making certain that the actual monetary operation is measured against the forecast.
Thesis statement: It is important for ever organization to have a budget. This is because budgets help in planning activities to be undertaken financially to avoid wastage of money which might lead to dissolution, experiencing loss and other negative effects of improper use of money. For organizations that use budgets, it is a guarantee that they can undertake all activities financially, without any problem.
How a budget works to discipline a firm`s management.
A budget is a significant statement in an organization. This is because it helps in planning activities that are carried out daily in various institutions. For any financial department to run well, a budget has to be constructed. This is to guide the organizational staff to know and have in mind how to conduct their daily activities. A budget in an organization helps to make the managerial staff responsible. This is one way that offers support to make certain that inconveniences that may arise are avoided. With a budget, an individual is able to have knowledge on what amount of money is needed in order to cater for all the activities to be undertaken. The aim of any financial organization is to make profit. With the help of a budget, the managerial staff is able to plan on how to bring in all the facilities needed for production of goods and rendering services to their clients. Since there is no individual who wants to fail and experience losses rather than profits, budgets help managerial staffs to make sure that all activities run as expected and this is what makes them responsible.
A budget in any institution is also helpful as it provides guidance on how to schedule the quantity of goods to be ordered in accordance to the demand in the market. In different times of the year, demands of different products change. In this case, organizations always look forward to producing and supplying goods that are highly demanded. This is mainly because they aim at making profits at higher rates. A budget therefore, enables an organization to have a breakdown of all the goods needed in order to view whether they can supply what is needed mostly or not. It helps to make the managers know whether all that is required in the market can be available in order to make quick orders. This is a methodology which will in turn help an organization to make more profits by maintaining clients and attracting even more due to effective services.
Elements of a budget.
A budget consists of a list of expenses of a certain organization (McMullen 1916). The other elements that are also included in budgets include revenues and supports. These are meant to act as guide in order to help the managerial staff in various organizations to plan carefully to avoid confusion. The figure below shows an example of a budget. When preparing a budget, it is important to have information on all personnel and non-personnel everyday expenditure in relation with the undertakings of an organization (Khan, 2004). Generally, a budget contains monetary figures of expenses and revenues for proper planning.
Below are some examples of budgets:
Construction of a budget.
Construction of a budget in an organization involves the creation of an accounting form. In this case, the form contains different information details that an organization requires in order to run daily activities and plan for the future and for the betterment of the organization at large. This form entails details on the revenue recognition, the construction costs and other expenses that are meant to help the managerial staff in an organization put in place enough capital to help in scheduling all the processes that are to take place and all requirements needed for them to be accomplished. This means that the form mainly has information on the monetary value needed for undertaking various activities in the union. Some of the information on construction that is included in the budget is: subcontracting costs which stands for costs related to land needed, labor cost and material cost. All these costs are known as the direct costs. In an organization with such information, it gives a clear impression that it is one which can start from scratch. This is mainly indicated by the inclusion of monetary information on land which means it requires capital to put up some structures where the undertakings will be carried out daily. For companies that already have buildings and are not in need of more land for expansion, such information is omitted as capital for that undertaking is not needed. The capital in place at this stage, can only be used to cater for those needs that are available to improve on the services of the organizations and make it better for clients and for the organization as well.
Indirect costs in the budget of an organization include tools, supplies, equipment costs, support costs, indirect labor, supervision and insurance. Revenue recognition is another content that is included while constructing a budget. In many cases, this revenue is recognized using the proportion of closing methodology. Various organizations get to know more about their developments through this revenue recognition. It is simply done through estimation for the general expected profit for particular services or contracts multiplied by the percentage estimate of the same service rendered or contract. In this case, the organizations that rely on this type of revenue recognition method experience a problem. The challenge faced at this point is that there is a risk of relying on estimates since the digits used to calculate the product and find the percentages have been estimated. The advantage with this methodology is that it s allowed where the estimates cannot be determined. There is another methodology where the revenue is calculated after a contract is completed. The limitation of this method is that it is not allowed if the results obtained from the methodology of percentage completion differs from what is obtained I this method.
Variance analysis and its usage.
Variance refers to the differences between budgeted and the actual amount of money incurred. Variances can be worked out for both revenues and costs. The perception of variance is basically connected with actual and scheduled results and effects of the difference between both of them on the performance of the organization. Variance analysis is therefore, mainly used to determine the difference between the real and the scheduled amount in order to know how to plan for financial uses. There are different types of variances and they can be divided in regards to their nature of the underlying amounts and their effects. Taking into consideration their nature of the underlying amounts, the information on variance analysis is determined by the requirements of clients of variance data. The information in this case may include: Variable cost variances and fixed production overhead variances. For both of the variances above, there are subdivisions for each.
i. Variable cost variances
* Direct labor variances
* Direct labor variances
* Variable production overhead variances
ii. Fixed production overhead variances
* Sales variances
Variance analysis in accounting refers to the tool of budgetary control through evaluation of a show by means of variances amid scheduled amount and the actual amount. In management accounting generally, variance analysis is used to calculate the costs and revenues in an organization. This is meant to help organizations have a track of each and every activity that takes place so as to make follow-up on everything. Making follow-up makes it easy to have a review of all that takes place. This helps in enabling the organizations have ample time in decision making and handling daily activities. Variance analysis is also used for explanation of the difference between the actual and scheduled sales. This gives a clear impression that the companies in question are able to calculate and know the quantity of goods to be ordered within a certain period. This is meant to avoid a situation where stock stays in place for a long time without being sold. Stock that stays for a long period of time without being purchased causes lots of inconveniences. This is simply because the stock will old back capital that would have in turn be used to purchase other valuable goods or used for other significant undertakings.
Harris in his book concentrates on the basic theory of variance analysis. He explains how the analysis was formed and how applicable it is in the field of accountancy. In this book, Variance Analysis, he provides readers with the knowledge on what to implement in order to have effective management. He goes on to show how a simple variance analysis problem can be solved to make certain that every problem is solved. To solve such a problem, there is a certain procedure to be followed and this is what he includes in his explanation (Harris, 1997).
Berger talks of the fact that managers should be held accountable for their performance and the organization at large. A well-designed dependability accounting coordination integrates accountability centers within an organization. In addition, dependability centers are units within an organization, which have power over costs and revenues. There are different forms of accountability centers such as investment centers, profit centers, cost centers and revenue centers. Berger in his manuscript focuses on the cost centers. Here he gives an explanation on a variance analysis based on standard costing. He goes on to explain that it is a performance measure of a cost center. In addition, a standard costing coordination is a useful instrument facilitating decision-making. It thereby means that with this, an organization is in a position to standalone and make wise decisions that will lead to proper handling of issues and smooth running of day-to-day activities in the organization (Berger, 2011).
With its clear presentation and hands-on education approach, Managerial Accounting: A Focus on Ethical Decision Making, gives an individual everything needed to know as while facing the challenges and rewards of the commerce world. The authors of this manuscript use realistic organizations and real matters to give a clear illustration of concepts without getting into multifaceted data that can lead to confusion. A pioneering and easy-to-learn five-step problem-solving technique gives one a proven decision-making outline that will help in defining the problem, spotting the objectives, examining available selection and selecting the best resolution. Jackson, Sawyers and Jenkins are those authors who have discussed on this and they make it easier for individuals who experience such challenges to face them with courage and get solutions to them appropriately. The content of the book helps the reader to develop better decision making skills which can be used in solving many problems within a short period of time (Jackson, 2008).
Conclusion and Recommendation
A budget is an important plan in any organization. This is because it offers assistance in making certain that all the activities pertaining monetary values are planned. This gives a clear impression that organizations using budgets for planning always know how to use and when to use their money. Planning therefore, makes it easy for many organizations to make sure that all facilities needed for daily activities are available and that all clients are served well and are satisfied. It is an added benefit to the association as well, since they are able to attract more clients due to their satisfactory services. It means that with the high attraction of clients, the organizations are in a position to make more profits and run the activities smoothly as expected.
Unions that use budgets always have an ample time scheduling their purchases throughout the year enabling them to know how much they spend in a year. This helps to note the times when there is a low season in the business activities either in selling or purchasing. Knowledge on fluctuation of the demand and supply of goods makes it easy for organizations to know when to purchase more and when to purchase low due to change in demand. This helps to ensure that there are no surplus goods to avoid losses and wastage. It is important for every organization to have a budge in order to plan for financial activities early. This is to boost the effectiveness of the organization`s services for it to improve on its sales, maintain clients, attract more clients and make more profits. This will in turn help the society at large. In this case, organizations that specialize in charity work can use what they have in helping the unfortunate in the society. It therefore means that if they make more money, the number of individuals to be offered support in the society increases which makes the societal life better day by day. It all starts with the effort of the organizational staff, which is what determines the end results.
Berger, A. (2011). Standard Costing, Variance Analysis and Decision Making. Harlow: GRIN Verlag.
Harris, E., West, C. (1997). Variance Analysis. United States: Chartered Institute of Management Accountants.
Jackson, S. Sawyers, R. Jenkins, J .(2008). Managerial Accounting: A Focus on Moral Decision Making. Asia: Cengage Learning.
Khan, M. Y. (2004). Financial Management: Text, Problems and Cases, 4e. India: Tata McGraw-Hill Education.
McMullen, H. A et. al. (1916) The elements of state budget making. New York: Bureau of Municipal Research and Training School for Public Service.
Budget and its Importance Student`s