Budget Planning and Controlling Questions

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Budget Planning and Controlling 1

Budget Planning and Controlling
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Budget Planning and Controlling 2

Budgeting is very vital in control and planning process. Organizations prepare financial
budgets and monitor performance against them to determine how goals and objectives are achieved
as well as controlling their operations. A budget is made to inform an imperative decision like
coordination or acquisition of resources and fulfillment of financial obligations. In short, budgets
record events that occur before they occur. A realistic budget will benefit the owner as compared
to no budget at all since it helps in forecasting, flexibility and setting the right prices. Effective
planning requires looking at an association as a structure and realizing the affiliation amongst its
components. Planning entails developing objectives, timetables, and performance standards
required to employ an organization’s plan and conveying individual culpability for results.
Planning has products such as a baseline to measure and evaluate performance.
On the other hand, budgeting entails identifying, prioritizing, acquiring, and allocating the
requirements for carrying out the plan. The accounting system documents and interprets each
financial transaction. Therefore, budgeting can be used for both planning and controlling
(Churchill, 2019). However, creating a budget is a daunting task.
Budget Planning and Controlling
Large companies should focus on the control and management aspects of budgeting while
smaller and pioneering ones should focus on planning issues. Budgeting has many benefits in an
organization since it formalizes coordination between various departments while aligning these
activities to the strategic plan. These roles include:


Budget Planning and Controlling 3

Budgeting acts as a communication tool in an organization. This is done in two ways which
are gathering information about a company and distributing information. Managers and
non-managerial staff are consulted, and information is collected from them. The gathered
information is then analyzed and criticized to come up with filtered data.

Planning helps in the production of a detailed plan for different departments or sectors of
an organization. Planning depends on the forecast that has been made in the past to make
future decisions (Hybrid Accountant, 2019). With a plan, this helps to foster a sense of
caution and care among the employees or managers of an organization. Additionally, it
helps guide the management relating to the formulation of policies, estimating the use of
resources, etc. Excel and other spreadsheets are the most used models for planning.


Evaluation is judging something with a sort of standard (Hybrid Accountant, 2019). A
budget signifies target performance which is then compared with the actual performance
so that corrective action is taken when necessary. However, evaluation in real life is
complicated as some business aspects that are hard to quantify. Instances are; staff morale,
innovation, environmental friendliness, etc. Other business success factors need to be
considered equally.


Control or coordination
Control and coordination are very important for the growth of an organization.
Coordination means that different parts of business work in correspondence. An instance
of that is employing people that can sell 2000 units of a product whereas the business can
only manage to produce 500 units. Therefore, coordination should adhere to.

Budget Planning and Controlling 4


This is the reason for people’s desires, actions and needs. In this, managers need to know
ways of making individuals follow a budget and determining the level of budgeting in
terms of effort. Major approaches for achieving this are authoritarian technique and
participatory technique. Budgets should not be made very difficult nor easy. It should be
somewhere in between the two.


Budgeting helps minimize misuse and embezzlement of resources in an organization where
permission exists. It provides a means of regulating revenue and spending. Employees are
more accountable for their spending with authorization in use. Therefore, budgeting helps
prevent fraud.
A responsibility center is an organizational part where the administrator has some degree

of control and authority (Averkamp, 2019). A company’s organizational chart is a legitimate
source for identifying these responsibility centers. In detail, the role of managers in the
responsibility center is;

Managers are accountable for expenses but have no returns, assets or liabilities
responsibilities. The manager compares the actual amount with the budgeted
amount to determine the performance. A cost center may be a production cost
center, a service cost center or a party producing center.


Managers are responsible for raising revenue with no responsibility for production.
This is a revenue center. The manager’s primary responsibility is raising sales
revenue. These managers don’t measure the cost of making a product or the area of
investment properties. However, he is in control of selling overheads of produce.

Budget Planning and Controlling 5


Managers are responsible for generating and maximizing profits. The managers
measure performance in terms of expenses incurred and the revenue earned.
Therefore, a company can constitute a separate profit center and sell the products
to other departments like sales department. The sales department may then sell
services to the production department.


Managers measure the contribution it earns, which is the difference between sales
and variable costs. This is in a center known as the contribution center. Its main
objective is to increase its contribution. This can be done by increasing sales and
reducing variable costs (Singh, 2019). However, a manager has no control over
fixed expenses since they’re constant and reliant of policy decisions of higher


Lastly, managers have a role in controlling revenues and costs as well as
investments. The manager properly utilizes the assets used in his center. This center
is known as an investment center. Judging and evaluating the performance of
people is based on return on investments. Most large corporations employ this
strategy of management control. Alternatively, the performance of a responsibility
center can be measured by the residual income method. This method is most
appropriate where managers are autonomous and make their own investment

Responsibility center management model delegates operational authority to divisions and units,
which allows them to align their goals with an organization’s goals and o...

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