Profit Planning - Profit Planning I The basic framework of...

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Profit Planning I. The basic framework of budgeting a. Budget: a detailed plan for the future that is usually expressed in formal quantitative terms a.i. Planning: developing goals and preparing various budgets to achieve those goals a.ii. Control: involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change a.ii.1. To be effective a good budgeting system must provide for both planning and control. Good planning without effect is a waste of time and effort b. Advantages of Budgeting b.i. Communicate management’s plans throughout the organization b.ii. Force managers to think and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all their time dealing with day to day emergencies b.iii. Budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively b.iv. Budgeting process can uncover potential bottlenecks before they occur b.v. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction b.vi. Budgets define goals and objectives, that can serve as benchmarks for evaluating subsequent performance c. Responsibility accounting c.i. Is that a manager should be held responsible for those items and only those items that the manager can actually control to a significant extent c.i.1. Each line item (revenue or cost) in the budget is the
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