Budgeting Concepts and Process

Budgeting Concepts and Process

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Budgeting Concepts and Process

A budget has a higher chance of being achieved if the people involved in preparing it are knowledgeable. Even though the top leadership of an organization may have the information required in running the organization, they may not know the costs that the organization incurs at the departmental level (Hansen & Mowen, 2012). Therefore, they may underestimate costs of overestimate the expected revenues of the organization. This is one of the main reasons as to why it is vital for organizations to involve subordinate managers in the preparation of the budget since these managers have better knowledge various aspects of the running of their respective departments.

A participative budget is more effective if an organization uses a system of checks and balances, which prevents managers from abusing their power during the budget making process. A participative budget moves from the lower level managers to the middle level managers and finally to the upper level management of the organization. This provides the opportunity for review of the budget at each level with the top managers having the final word on the budget (Warren & Tayler, 2020).

Since a participative budget is reviewed at each level, the review strives to identify any costs that may lead to wastage or inefficiencies in the organization. However, before making changes to the final budget draft, it is vital for an organization to seek the input of the lower level managers. These managers would provide suggestions on certain entries in the budget (Hansen & Mowen, 2012). This ultimately leads to the creation of an effective budget. It ensures there is goal congruence as the management and staff set goals that have the same focus.

Therefore, an organization should ensure it involves multiple parties in the budget preparation process, as this would lead to the development of a more effective budget. However, involving multiple parties in the budget preparation process makes the process be time-consuming (Warren & Tayler, 2020).

References

Hansen, D. R., & Mowen, M. M. (2012). Cornerstones of Cost Management. Mason, OH: Cengage Learning.

Warren, C. S., & Tayler, W. B. (2020). Managerial Accounting (15th ed.). Boston, MA: Cengage Learning.