Master Budget Analysis

Introduction to Budgets and Preparing the Master Budget

Budgets and the Organization

Many people associate the word budget primarily with limitations on spending. For example, management often gives each unit in an organization a spending budget and then expects them to slay within the limits prescribed by the budget. However, budgeting can play a much more important role than simply limiting spending. Budgeting moves planning to the forefront of the manager's mind. Well-managed organizations make budgeting an integral part of the formulation and execution of their strategy. In Chapter I. we defined a budget as a quantitative expression of a plan of action. Sometimes plans are informal, perhaps even unwritten, and informal plans sometimes work

We will discuss four major advantages of effective budgeting: I. Budgeting compels managers to think ahead by formalizing their responsibilities for planning. 2. Budgeting provides an opportunity of managers to reevaluate existing activities and evaluate possible new activities. 3. Budgeting aids managers in communicating objectives and coordinating actions across the organization. 4. Budgeting provides benchmarks to evaluate subsequent performance. Let's look more closely at each of these benefits.

FORMALIZATION OF

Top management communicates the strategic goals and objectives of the organization in its budgetary directives. Lower-level managers and employees contribute their own ideas and provide feedback on the goals and objectives. The result is two-way communication about opportunities and challenges that lie ahead. Budgets also help managers coordinate activities across the organization. For example, a budget allows purchasing personnel to integrate their plans with production requirements, while production nuinugers use the sales budget and delivery schedule to help them anticipate and plan for the employees and physical facilities they will need. Similarly, financial officers use the sales budget, purchasing requirements, und other planned expenditures to anticipate the company's need for cash. Thus, budgeting forces managers to communicate and coordinate their department's activities with those of other departments und the company us a