Organization and Budgets

Organization budgets are of two kinds: operations budgets and financial budgets. The operating budgets indicate the goods and services the organization expects to consume in the budget period. They usually list both physical quantities (such as barrels of oil) and cost figures. The financial budget spell out in detail the money the organization intends to spend in the same period and where that money will come from. These different types of budgets make up the firm’s overall budgetary plan. Flexibility in budgeting is necessary because of the cyclicality of the market.

At the end of the fiscal year before publishing Annual Report for the shareholders and Stake holders internally the variance of each department’s budget is discussed with the concerned department head and is taken in the Annual Report and a note is given if necessary in the report implying the variance.

Operating Budgets

The most common types of operating budgets are the expenses, revenue, and profit budgets.

Expense Budgets: There are two types of expense budgets, one for each of the two types of expense centers – engineered cost budgets and discretionary cost budgets.

Engineered cost budgets are typically used in manufacturing plants but can be used by any organizational unit in which output can be accurately measured. These budgets usually describe the material and labor costs involved in each production item as well as the estimated overheads costs. ABC Co., for example, has an annual budget that describes the labor, material, and overhead expenses involved in manufacturing its computer peripherals (printers, plotters, and boards). Such an engineered cost budget is designed to measure efficiency. Exceeding the budget means that operating costs were higher than they should have been.

Discretionary cost budgets are typically used for expenses centers — administrative, legal, accounting, research, and other such departments in which output cannot be accurately measured. Discretionary cost budgets are not used to assess efficiency because performance standards for discretionary expenses are difficult to devise. For example, if XYZ Co research and development department exceeds its budget, it will often be difficult for managers to determine how that department’s work could have been performed more efficiently.

Budgeting for the Current fiscal year

This type of budget is based on previous year’s expenses and current year’s production and Sales (as projected) which are budgeted by the concerned authority of the department. For example conveyance and inland travel fall into this category and particularly budgeted by departments like Materials, Marketing and other applicable departments.

Revenue Budgets: Revenue budgets are meant to measure marketing and sales effectiveness. They consist of the expected quantity of sales multiplied by the expected unit selling price of each product. The revenue budget is the most critical part of a profit budget, yet it is also one of the most uncertain ones because it is based on projected future sales. Companies with a large volume of back orders or companies whose sales volume is limited only by their productive capacity can make firmer revenue forecasts than can companies that must reckon with the fluctuations of an unstable or unpredictable market. However, marketing and sales managers of even the latter type of company can control the quality and quantity of their advertising, service, personnel training, and other factors that affect sales. This control gives them some influence over sales volume and frequently enables them to make reasonably accurate sales estimates. The companies also influence sales through its control promotion and dealer incentives. Market fluctuation can also be the reason for increase or decrease in the budget.

This type of budget can control the whole department activity and is more flexible as the performance can be measured from time to time and the budget can be increased or decreased. This can be more applicable to Marketing as it has to deal with advertisement expenses, Dealer incentives, Salesmen commission etc.

Profit Budgets: A profit budget combines cost and revenue budgets in one statement. It is used by managers who have responsibility for both the expenses and the revenues of their units. Such managers head an entire division or company like Corning Inc.’s technical products division. Profit budgets, sometimes called master budgets, consist of a set of projected financial statements and schedules for the coming year. Thus, they serve as annual profit plans.