A budget is a detailed plan outlining the acquisition and use of financial and other resources over a given time period. As such, it represents a plan for the future expressed in formal quantitative terms. Budgetary control involves the use of budgets to control the actual activities of a firm.
7-2
1. Budgets provide a means of communicat-ing management’s plans throughout the organi-zation. 2. Budgets force managers to think about and plan for the future. 3. The budgeting process provides a way of allocating resources to those parts of the organi-zation where they can be most effectively used. 4. The budgeting process can uncover poten-tial bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization by integrating the plans of the various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subse-quent performance.
7-3 Responsibility accounting is a system in which a manager is held responsible for those items of revenues and costs—and only those items—that the manager can control to a signifi-cant extent. Each line item in the budget is made the responsibility of a manager who is then held responsible for differences between budgeted and actual results.
7-4 A master budget represents a summary of all of management’s plans and goals for the future, and outlines the way in which these plans are to be accomplished. The master budget is composed of a number of smaller, spe¬cific budgets encompassing sales, production, raw materials, direct labor, manufacturing over¬head, selling and administrative expenses, and inventories. The master budget generally also contains a budgeted income statement, balance sheet, and cash flow data.
7-5 The level of sales impacts virtually every other aspect of