Motivation, Budgets and Responsibility Accounting
Motivation, Budgets and Responsibility Accounting
Motivation, Budgets and Responsibility Accounting
Responsibility accounting
Master budget: coordinates all the financial projections in the organisation's individual budgets
in a single organization-wide set of budgets for a given time period. It embraces it the impact
of both operating and financing decisions.
Operating decisions: are about the acquisition and use of scarce resources.
Financing decisions: center on how to obtain the funds to acquire resources.
Roles of Budgets
Strategy and Plans
Budgeting is most useful when done as an integral part of an organisation's strategic analysis.
Strategy: can be viewed as describing how an organization matches its own capabilities with
the opportunities in the marketplace to accomplish its overall objectives.
strategy analysis
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Types of Budget
Time Coverage
The most frequently used budget period is one year. The annual budget is often subdivided by
months for the first quarter and by quarters for the remainder of the year.
Rolling budget: a budget or plan that is always available for a specified future period by adding
a month, quarter or year in the future as the month quarter or year just ended is dropped.
• Step 2: Production budget (in units). After revenues are budgeted, the production
budget can be prepared. The total finished goods units to be produced depends on
planned sales and expected changes in stock levels.
When unit sales are not stable throughout the year, managers must decide whether to
adjust production levels periodically to minimize stock held or to maintain constant
production levels and let stock rise and fall.
• Step 3: Direct materials usage budget and direct materials purchases budget. The
decisions on the number of units to be produced is the key to computing the usage of
direct materials in quantities and in euros.
• Step 4: Direct manufacturing labor budget. These costs depend on wage rates,
production methods and hiring plans.
• Step 5: Manufacturing overhead budget. The total of these costs depends on how
individual overhead cost very with assumed cost driver, direct manufacturing labor
hours. The specific variable- and fixed-cost categories may be obtained, following
discussions with company personnel in di2erent areas.
• Step 6: Closing stock budget. These unit costs are used to calculate the cost of target
closing stocks of direct materials and finished goods.
• Step 8: Other (non-production) costs budget. For brevity, other areas of the value
chain are combined into a single schedule.
As strategies change, the budget allocations for di2erent elements of the value chain will also
change.
Kaizen Budgeting
Kaizen budgeting: is a budgetary approach that explicitly incorporates continuous
improvement during the budget period into the resultant budget numbers.
Activity-BasedBudgeting
Activity-based budgeting: focuses on the cost of activities necessary to produce and sell
products and services. It separates indirect costs into separate homogeneous activity cost
pools.
Management uses the cause-and-e2ect criterion to identify the cost drivers for each of these
indirect-cost pools.
The responsibility accounting approach costs to either the individual who has the best
knowledge about why the costs arose or the activity that caused the costs.
Feedback
Variances, properly used can be helpful in four ways:
1. Early warning
2. Performance valuation
3. Evaluating strategy
4. Communicating the goals of the organization.
Performance report for responsibility centers may also include uncontrollable items because
this approach could change behavior in the directions top management desires.
Budgeting: a Discipline in Transition