Budget as an Operating Plan

Introduction In every organization, management makes plans. A group of people operating without some sort of plan is incoherent, directionless, and not an organization. In any organization, such as a company operating a business, the leaders (i.e., the managers) dedicate considerable thought to the question of what the firm’s objectives should be and the best way of reaching them. Although all man…

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Discretionary Budget

Definition A discretionary budget is an unspecified lump sum that states what the amount is for, what the maximum sum overall will be, and possibly specifies also a maximum sum per item. Discretionary budgeting is useful when the expenditure for each item is small in terms of value. The administrative cost of dealing with each item far outweighs the control benefit available. However, control is m…

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Revenue and Cash Budgets

Definition Revenue budgets are primarily concerned with sales income or income generated in other ways. Revenue needs to be scheduled as to when it is expected to come in and how it is to be allocated. This is part of the function of the cash budget. Explanation An operating budget is prepared in terms of revenues and expenses. For financial planning purposes, it translates into cash receipts and…

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Manpower Budget

Definition Manpower is the most expensive and complex resource in any business. In a responsibility accounting system, each cost center manager needs to specify the human resources that are available, as well as those that are required, to carry out the operations. For this purpose, a manpower budget is prepared. Explanation Employment costs need careful consideration. They are affected by interna…

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Project Budget

Projects are long-term activities that may stretch over several annual budget periods. The term “project” is used to indicate, for example, the construction of a building rather than a one-off major purchase, normally covered in the capital budget. The project budget for a long-term project budget is difficult to prepare for several reasons, including the issues of cost escalation and design chang…

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Operating Budget

Parts of the Operating Budget The operating budget consists of two parts: Program budget Responsibility budget Both budgets arrive at the same figure for projected net income and return on investment. An overview of each one is given below. Program Budget The program budget describes the major programs that the company plans to undertake. This budget is arranged by product line and shows the antic…

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Profit Planning

Definition of Profit Planning Profit planning aims to set a profit objective for a budgeting period. Also, it seeks to establish the main policy decisions regarding how to achieve the objectives. The profit objective will normally be related to the return required on the investment in the business. In profit planning, alternatives are evaluated to select the most likely option that will yield the…

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Performance Budgeting (PB)

Performance Budgeting (PB): Explanation Performance budgeting involves the development of refined management tools (such as work measurement performance) so as to achieve the specific goals of the business over a period of time. The emphasis in performance budgeting is on the improvement of internal management, keeping in view the volume of work and its cost, that has to be accomplished during a f…

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Zero-Based Budgeting (ZBB)

Zero-Based Budgeting: Definition In the zero-based budgeting (ZBB) approach, all organizational activities are initially set to zero. ZBB is the newest approach to budgetary planning and control. The approach was successfully developed and implemented in the 1970s by Peter A. Phyrr. It was further popularized in 1979 when President Jimmy Carter of the United States required its use for the federal…

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Implementation of Budget

The implementation of a budget is the responsibility of the budget director. The success of the entire exercise of budgeting depends on two important factors. First, proper and clear communication to all key people involved in the implementation of the budget. These stakeholders should have a clear understanding of what is expected of them and how to achieve the goals. Second, cooperation and enco…

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