MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
The budgeting cycle includes the following elements:
Planning the performance of the company as a whole as well as planning the performance
of its subunits. Management agrees on what is expected.
Providing a frame of reference, a set of specific expectations against which actual results
can be compared.
Investigating variations from plans. If necessary, corrective action follows investigation.
Planning again, in light of feedback and changed conditions.
expresses management’s operating and financial plans for a specified
period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial
plan of what the company intends to accomplish in the period.
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In
turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about
the likely effects of their strategic plans. Managers use this feedback to revise their strategic
We agree that budgeted performance is a better criterion than past performance for
judging managers, because inefficiencies included in past results can be detected and eliminated
in budgeting. Also, future conditions may be expected to differ from the past, and these can also
be factored into budgets.
Production and marketing traditionally have operated as relatively independent business
functions. Budgets can assist in reducing conflicts between these two functions in two ways.
Consider a beverage company such as Coca-Cola or Pepsi-Cola:
Communication. Marketing could share information about seasonal demand with
Coordination. Production could ensure that output is sufficient to meet, for example,
high seasonal demand in the summer.
In many organizations, budgets impel managers to plan. Without budgets, managers drift
from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and
improve their performance. Thus, many top managers believe that budgets meet the cost-benefit
also called a
is a budget or plan that is always
available for a specified future period, by continually adding a period (month, quarter, or year) to
the period that just ended. A four-quarter rolling budget for 2007 is superseded by a four-quarter
rolling budget for April 2007 to March 2008, and so on.