According the information provided, please explain and describe the budgetary control process depicted.
BUDGET PROCESS AND ADMINISTRATION Budgeting Process Managers must ensure that activities of employees and departments contribute to meeting the C1 company's overall goals. This requires coordination and budgeting. Budgeting, the process of Describe the benets of planning future business actions and expressing them as formal plans, helps to achieve this budgeting. coordination. A budget is a formal statement of a company's plans, expressed in monetary terms. Unlike long-term Strategic plans, budgets typically cover shorter periods such as a month, quarter, or year. Budgets are useful in controlling operations. The budgetary control process, shown in Exhibit 22.1, refers to management's use of budgets to see that planned objectives are met. EXHIBIT 22.1 Process of Budgetary Control Develop Budget Compare Actual Take Action Set New Plans to Budget The budgetary control process involves at least four steps: ( 1) develop the budget from planned objectives, (2) compare actual results to budgeted amounts and analyze differences, (3) take corrective and strategic actions, and (4) establish new objectives and a new budget. In this chapter we focus on the first step in the budgetary control process, developing a bud- get. In the next chapter we show how managers compare budgeted and actual amounts to guide corrective actions and make new plans. Many companies apply continuous budgeting by preparing rolling budgets. In continuous budgeting, a company continually revises its budgets as time passes. In a rolling budget, a com- pany revises its entire set of budgets by adding a new quarterly budget to replace the quarter that just elapsed. Thus, at any point in time, monthly or quarterly budgets are available for the next 12 months or four quarters. The rolling budget below shows rolling budgets prepared at the end of two consecutive periods. The first set (at top) is prepared in December 2018 and covers the four calendar quarters of 2019. In March 2019, the company prepares another rolling budget for the next four quarters through March 2020. This same process is repeated every three months. As a result, management is continuously planning ahead. Benets of Budgeting Budgets benefit the key managerial functions of planning and controlling. 0 Plan A budget focuses on the future opportunities and threats to the organization. This focus on the future is important because the daily pressures of operating an organization can divert management's attention from planning. Budgeting makes managers devote time to plan for the future. 0 Control The control function requires management to evaluate (benchmark) operations nan against some norm. Since budgeted performance considers important company, industry, and economic factors, a comparison of actual to budgeted performance provides an effective monitoring and control system. This comparison assists management in identifying problems and taking corrective actions if necessary. 0 Coordinate Budgeting helps to coordinate activities so that all employees and departments understand and work toward the company's overall goals. 0 Communicate Written budgets effectively communicate management's specific action plans to all employees. When plans are not written down, conversations can lead to uncer- tainty and confusion among employees. 0 Motivate Budgets can be used to motivate employees. Budgeted performance levels can provide goals for employees to attain or even exceed. Many companies provide incentives, like cash bonuses, for employee performance that meets or exceeds budget goals. . Decision Insight Budget Bonus Budgets are important in determining managers\" pay. A recent survey shows that 82% of large com panies tie managers' bonus payments to beating budget goals. For these companies, bonus payments are frequently more than 20% of total manager pay. I Example: Assume a company's sales force receives a bonus when sales exceed the budgeted amount. How would thls arrange- ment affect the participatory sales forecasts? Answer: Sales reps may understate their budgeted sates. @Cultura RFfGelty Images Budgeting and Human Behavior Budgets provide standards for evaluating performance and can affect employee attitudes. Bud- geted levels of performance must be realistic to avoid discouraging employees. Employees who will be evaluated should help prepare the budget to increase their commitment to it. For exam- ple, the sales department should be involved in developing sales estimates, while the production department should prepare its initial expense budget. This bottom-up process is usually more useful than a top-down approach in which top management passes down the budget without input. Performance evaluations must allow the affected employees to explain the reasons for apparent performance deficiencies, rather than assigning blame. Budgeting has three important guidelines. 1. Employees affected by a budget should help prepare it (participatory budgeting). 2. Goals reflected in a budget should be challenging but attainable. 3. Evaluations offer opportunities to explain differences between actual and budgeted amounts. Budgeting can be a positive motivating force when the guidelines are followed. Potential Negative Outcomes of Budgeting Managers must be aware of potential negative out- comes of budgeting. Under participatory budgeting, some employees might understate sales bud- gets and overstate expense budgets to allow themselves a cushion, or budgetary stack, to aid in meeting targets. Sometimes, pressure to meet budgeted results leads employees to engage in unethical behavior or commit fraud. Finally, some employees might always spend their budgeted amounts, even on unnecessary items, to ensure their budgets aren't reduced for the next period. . Decision Insight Budget Strategy Most companies allocate dollars based on budgets submitted by department managers. These managers verify the numbers and monitor the budget. Managers must remember. however, that a budget is judged by its success in helping achieve the company's mission. One anaiogy is that a hiker must know the route to properly plan a hike and monitor hiking progress. I Budget Reporting and Timing The budget period usually coincides with the company's scal year. To provide specic guid- ance to help control operations, the annual budget usually is separated into quarterly or monthly budgets. These short-term budgets allow management to periodically evaluate performance and take corrective action. The time required to prepare a budget can vary a lot. Large, complex organizations usually take longer to prepare their budgets than do smaller ones. This is because of the effort required to coordinate the different units (departments) within large organizations. Rolling Budgets (Calendar Years and Quarters) c .9 +1 E December in _ a. a: 2018 E a n- a r... 3, March _ Second Third Fourth First g 2019 Quarter Quarter Quarter Quarter m 2019 2020 I Decision Insight Budget Needs Many companies use zero-based budgeting, which requires all expenses to bejustified for each new budget. Rather than using last period's budgeted or actual amounts to determine this period's budgets, ma nag- ers instead analyze each activity in the organization to see if it is necessary. Managers then budget for only those necessary activities. Madefromscratch budgets can be useful in identifying waste and reducing costs
