Ch10-EndOfChQues&HWSoln

Cost Management: A Strategic Emphasis

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CHAPTER 10: STRATEGY AND THE MASTER BUDGET QUESTIONS 10-1 Compel strategic planning and facilitate implementation of strategic plans . An organization’s strategy, strategic plans, and budgets are interrelated. Preparing budgets compels reviews of an organization’s strategy and its strategic plans and can facilitate implementations of the strategic plan. Feedback from budgets often results in improvements to an organization’s strategy and strategic plan. Serve as a basis for performance evaluation . Budgets serve as the benchmark against which actual performance can be compared. Budgets are a better basis for judging performance than past performance for two reasons. First, budgeted amounts take into account expected changes and improvements in the environment. Second, past performance is a result of past events and operations and may not be suitable to serve as a benchmark. To the extent past performance was not effective/efficient it does not make sense to use this as the standard against which actual performance is compared. Motivate managers and employees . Budgets, if internalized, serve as goals for managers and employees and, if properly implemented, can motivate them toward achievements of the goals. Promote coordination and communication within the organization . Budgets compel managers to think of interdependencies and interrelationships among subunits of the organization. A budget is also a communication device that helps all employees and managers understand and accept the organization’s objectives and expected roles and contributions over the coming period. Authorization to act . The approved budget, particularly in a not-for-profit setting, gives the manager authorization to act (make decisions, etc.). Other benefits can include serving as a basis for resource allocation, aiding cash- flow management, and providing authorization documentation. 10-2 An organization’s strategic plan describes how the organization matches its strengths and weaknesses with the opportunities and threats in the marketplace in order to accomplish its long-term goals (e.g., achieve sustainable competitive advantage). It is the guideline for the firm’s short-term and long-term operations. A strategic plan may extend over several budget periods (e.g., years) covered by a master budget. 1
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A master budget is a comprehensive operational plan of action for the coming year. It includes both operating budgets and financial budgets and culminates in a set of forecasted (i.e., pro-forma ) financial statements (cash flow, income statement, and balance sheet). The strategic plan of a firm guides, in a general sense, the determination of the master budgets prepared annually by the organization. Specialized consulting companies now provide software that can be used to integrate master budgets with strategic plans as part of a comprehensive performance management system. (See, for example, Geac, at http://www.geac.com/object/GeacMPCBrochure_PM.html .) 10-3 A master budget
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Ch10-EndOfChQues&HWSoln - CHAPTER 10: STRATEGY AND...

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