A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity. Budgeting is a task that should be completed by all organizations, not only those limited to manufacturing. Unfortunately, there are many individuals who want to operate a business and know nothing about budgeting. Often, professional organizations or industry trade groups offer information to help their members succeed in business. For example, the real estate profession provides information and suggestions such as this article on preparing a marketing budget to help professionals.
The common usage of the word “budget” refers to a financial plan by an individual or an organization based on their projected income and expenses. By extension, it also is used in the sense of the amount that individual or organization has available to spend. Its first use in our contemporary understanding of a financial plan comes from the pamphlet The Budget Opened by William Pulteney, which uses the term budget to describe and critique the governments’ fiscal policy on wine and tobacco. Shows how operating budgets and financial budgets are related within a master budget.
This makes local governments look more like private companies that charge users for the goods and services that people receive. This approach enables the public to make a direct connection between what they pay and what they get. In order to apply a fee or charge, the local government must be able to limit those who receive the service and must create a mechanism for collecting payment. A service could also be subsidized for everyone or discounts could be provided based on a person’s income.
Local governments may spend considerable time debating allocation of funds to a new initiative or budget reductions necessary to balance a budget. This will not be done, however, for everything that the government does. Many areas are likely to receive a superficial review that focuses on the incremental or marginal change from the previous year. If there are no public issues in how the service is performed and the amount of change appears reasonable, the service is likely to receive little review.
As the chosen representatives of the stockholders, board members give the final thumbs up or down on proposed company budgets. Board members are voted in or out at stockholder meetings, and as such, they answer directly to company owners or shareholders. This provides a strong accountability for executives to draft budgets in the best interest of company owners or shareholders.
Mangers therefore need to plan when and to what extent they’ll draw on existing cash reserves, liquidate investments, tap their line of credit, or issue short-term notes. Conversely, they’ll use the cash flow forecast to plan how they’ll restore reserves, invest in safe money-market instruments, or payoff short-term debt. A budget committee is an official group that creates and oversees the standards and best practices to implement and update an organization’s forest of the priest 4th job spending and resource allocation plans while maintaining fiscal responsibility. Budget committees play a key role in the success or demise of a company or other entity that relies on generating and spending cash flows in order to remain operational. This committee is charged with keeping organizational budgets on track, which then ensure smooth operation and financial solvency and to stave off any financial problems before they get out of hand.
Involving all employees in each department will mean that the negotiations may take too long before the staff reaches an agreement. If there is no agreement, the management will need to make the final decision, which means that the staff will need to accept an imposed decision. A participative budgeting process will be more effective when the organization adopts a system of checks and balances to prevent unruly managers from abusing their power. Since the budget moves from the lower managers to the middle and then to the top management, the budget draft can be reviewed at each level of management, with the top managers having the final say.
Existing information regarding fixed manufacturing costs are combined with variable manufacturing costs to determine the manufacturing overhead budget. The information from the sales budget is used to determine the sales and administrative budget. Finally, the sales, direct materials, direct labor, fixed manufacturing overhead budget, and sales and administrative budgets are used to develop a pro-forma income statement. Often budgets are developed so they can adjust for changes in the volume or activity and help management make decisions. Changes and challenges can affect the budget and have an impact on a company’s plans. A flexible budget adjusts the cost of goods produced for varying levels of production and is more useful than a static budget, which remains at one amount regardless of the production level.