Using Budgets for Planning and Coordination Contemporary Management Accounting Issues Accounting 586 Chapter 10
Focus of the Theme • Theme 2 examines budgeting & control • The last chapter examined MACS particularly with respect to
Focus of this Chapter • This chapter examines budgeting for planning and coordination • The budget provides feedback and control
Importance • Budgeting is one of the most universal and visible components of a MACS • A budget is a primary source of feedback and control in an organization – On budget, over budget, under budget • The budget is a practical expression of business strategy – If you really want to see what is important in an organization, look at the budget • The budgeting process can influence the budget and the implementation of strategy
Review of Cost Concepts • In the short run – Fixed costs do not vary with quantity of output – Fixed AKA capacity costs or joint costs • Expenses on plant, property, & equipment – Variable costs change or vary with quantity – Only variable costs impact short run decisions • In the long run – All costs are variable – All costs impact decisions
Background Concepts • The annual budgeting process determines planned levels of variable costs • The capital budgeting process (long range budgeting) determines expenditures on plant, property, & equipment – Provides capacity
Budgeting Basics • Budgeting is a tool for – Planning: what we want to have happen – Control: standard to which actual performance is compared (is corrective action needed?) • The budget illustrates – Allocation of resources over a time horizon – Expressions of planned inflows & outflows of money over a time horizon – Whether planned operations will meet financial goals
Budgeting Basics • The budget is a practical expression of strategy – Annual budget: short run strategy – Multi-year budget: long term strategy • The budget communicates strategy in the organization
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- Spring '14