• important tool for effective short-term planning and control
• operating budget usually covers one year and states revenues and expense planned for year

• estimates profit potential of business unit
• stated in monetary terms, although amounts may be backed up by nonmonetary amounts (units sold / produced)
• covers period of one year (seasonal budgets might have two)
• managemnet comimtment, managers agree to accept responsiblitiy for attaining objectives.
• reviewed and approved by authority higher than budgetee
• once approved, budget can be chaged only under specific conditions

• strategic planning
• forecasting

• involves planning but activities are different
• budget process focuses on single year, where as strategic planning focuses on activities that extend over a period of several years
• strategic planning precedes the budget and provides a framework within which the annual budget is developed
• budget is one year slice of organization's strategic plan
• strategic plan is structured by product lines or other programs while budget is structured by responsiblity centers.

• budget is management pan with assumptions that positive steps will be taken by budgetee to make actual events correspond to plan
• forecast is merely a prediction of what will most likely happen carrying no implication that forecaster will attempt to shae events that the forecast will be realized.

• may or may not be stated in monetary terms
• can be for any time period
• forecaster doesn't accept responsibility for meeting results
• not usually approved by a higher authority
• forecast is updated as soon as new information indicates there is a change in conditions
• variances from forecast are not analyzed formally or periodically.

• fine-tuning strategic plan
• help coordinate activities of several parts of organization
• assign responsiblity to managers, authorize amounts permitted to spend and inform them of performance expected of them
• obtain commitment that is a basis for evaluating manager's actual performance

• prepared early in the year
• developed on best information available at the time
• preparation involves few managers
• stated in board terms.
• completed just prior to beginning of budget year, provides opportunity to use latest available information based on judgment of managers at all levels throughout organization
• make decisions that will improve performance before a commitment is made to a specific way of operating during the year

• every responsiblity center manager in the organization participates in preparation of budget
• inconsistencies may show up in assembling pieces of budget
• most common is that plan of productionn organization isn't consistent with plans of plants or departments within plants to provide components for these products. 

• should make clear what each manager is responsible for
• authorizes responsibility center managers to spend specified amounts of money for certain designated puposes without seeking approval of higher authority.

• budget represents commitment by budgetee to supervisor and is benchmark against what actual performance can be judged
• subject to change if assumptions change but is excellent starting point for performance appraisal
• assigns responsiblity to each responsibility center
• at top level, budget summary assigns responsibility to individual profit centers
• within profit center, budgets are assigned responsiblity to functional areas (market, etc)
• within functional areas, budget assigns responsiblity to individual responsiblity centers

• strategic plan
• capital budget
• cash budget
• budget balance sheet

• in small companies, budget may fit one page
• in larger organizations: summary and other page with details on units + R&D and SGA.
• revenue is listed first b/c it's listed first on an income statement and budgeted revenues influence amount of othe items.

• consists of unit sales projection multipled by expected selling prices
• revenue budget is most critical but it is element that is subject to greatest uncertainty
• degree of uncertainty differs among companies and within same company the degree of uncertainty is different at different times
• companies with large backlogs or  companies whose sales volumes are constrained by production capacity will have more certainty in sales projections than companies whose sales volumes are subject to uncertainties in the market

• direct material cost and direct labor cost are developed from product volumes contained in sales budget, usually not feasible in practice because details depend on actual mix of products being manufactured.
• product managers make plans to obtain quantities of material and labor and they may prepare procurment budgets for long-lead times
• budgeted cost developed by production manager may not be for the same quantities of products as shown in sales of budget; difference represents additions or subtracitons from finished goods inventory.

• expenses incurred to obtain sales
• fraction of amounts included in budget may have been committed before the year begins.
• if budget contemplates a selling organization of a specified nuber of sales offices with specified personnel, then plans for opening / closing offices or hiring/firing personnel must be well under way before the year begins
• logistics are usually reported separately from order getting expenses - order entry, warehousing, and order picking, transportation to a customer, collection of a/r

either two approaches or combination

• total amount is the focus in one approach - current level of spending, adjusting for inflation or maybe a large amount
• alternative approach is aggregating planned spending on each approved project polus an allowance for work that is likely to be undertaken even though it is not currently identified

• state approved capital projects, plus a lump-sum amount for small projects that don't require high-level approval
• usually prepared separately from operating budget and by different people
• propsals are considered at various levels within the organization and some are finally approved
• approved projects are assembled into overall package and examined in total. 

• shows implications of decisions included in operating budget and capital budget
• not a management control device but parts are useful, operating managers who can influence levels of inventories, A/R and A/P are responsible for level of those items

• process of making objectives explicit
• some MBO systems are separate from budget process

• publishes procedures and forms for prepping budget
• coordinates and publishes basic assumptions that are basis for budget (economy assumptions)
• makes sure information is properly communicated between interrelated organization units (sales and production)
• provides assistance to budgetees in preparation of budget
• analyzes propsed budgets and makes recommendations, first to budgetee and then to senior management
• administers process of making budget revisions during the year
• coordinates work of budget departments in lower echelons
• analyzes report performance against budget, interprets results and prepares summary reports

• consists of members of senior management, CEO, COO, CFO
• in some companies, CEO decides without a committee
• committee performs a vital role; reveiws and approves or adjust each of the budgets.

• first year of strategic plan (approved by summer) is to begin budget prep process
• if company has no strategic plan, management needs to think about future as basis for budget prep
• deveop strategic plan usually doesn't involve lower-level repsonsibility managers
• whether or not there is a strategic plan, first step in process is to develop guidelines that govern preparation of budget
• implicit in strategic plan modified by developments than occured since approval.

• using guidelines, responsiblity center managers develop a budget request
• budget is based on existing levels which are modified in accordance with guidelines

• changes in external forces
• changes in internal forces

• general level of economic activity affected volume of sales
• expected changes in price of purchased material and services
• change in labor rates
• change in cost of discretionary activities (marketing, R&D, and admin)
• changes in selling price

• changes in production costs (new equipment, methods)
• changes in discretionary costs (changes in workload)
• changes in market share and product mix

• discuss propsed budget with superior, who attempts to judge validity of each adjustments
• superior recognizes that they will become budgetee and the next level of budget process and needs to defend what they agree to

• many budgetees tend to budget revenues lower and expenses higher than their best estimate so the resulting budget is an easier target to achieve
• difference between budget amoutn and best estimate is slack or "water"
• superiors attempt to discover and eliminate slack but it's difficult

• propsed budget goes up through successive levels in the organization
• analysts put the pieces together and examine the total for consistency
• review budget and either approve it, or ask for revisions.
• If major revisions occur, CEO has to approve budget again
• Final approval is recommended by the budget committee (CEO, CFO, COO) to CEO and CEO submits approved budget to BOD for ratification

• procedure for revising budget after its been approved
• if it could be revised at will there would be no point in reviewing and approving budget
• if budget assumptions are so unrealistic that the comparison of actual numbers against budget are meaningless, then budget revisions are made

• procedures that provide for systematic (quarterly) updating
• procedures that allow revisions under special circumstances

• some companies routinely prepare contingency budgets that identify management actions to be taken if there is a significant decrease in sales volume from what was anticipated at the time of developing the budget
• contingency budget is a quick way of adjusting to changed conditions

• encourage manager to be effective and efficient in attaining goals of organization
• fine line between helping the line manager and ensuring hte integrity of organization (similar to dotted line / solid line)

• top down
• bottom up

lower level manager's "participate" in setting budget amounts

bottom up is most likely to generate commitment to meeting budgeted objectives, but unless carefully controlled, it may result in amounts that are too easy or that may not match company objectives

• likely to be greater acceptance of budget goals if they are perceived as being under management's personal control rather than imposed externally
• participative budgeting results in effective information exchanges.

• ideal budget is challenging but attainable
• interpreted as meaning that manager who performs reasonably well has a 50% chance of achieving budget amount

• if budgeted target is too difficult, managers are motivated to take short-term actions that may not be in long-term interest of company
• achievable budget targest reduce motivation for managers to engage in data manipulation (inadeuqate provisions for warranty claims, bad detbs, etc) to meet budget
• if business unit profit budget represents achievable targets, senior management can divulge profit target to security analyst
• profit budget that is difficult to attain usually implies overly optimistic sales target

• necessary for any budget system to be effective in motivating budgetees
• participate in reveiw and approval of budgets (no rubber stamp)
• without active participation there will be temptation for budgetee to play games with the system (submit easily attained budget)
• managers must follow up on budget results, no top management feedback means system will not be effective in motivating the budgetee.

• must analyze budget in detail and be certain that budgets are prepared properly and information is accurate
• department must act in ways that line managers perceive as hostile or threatening
• must walk fine line between helping line manager and ensuring integrity of system
• members of budget department must be impartial and fair
• personable skills required to deal effectively with people

• simulation
• probability estimates

• method that constructs a model of a real situation and manipulates the model in a way to draw conclusions about the real situation
• preparation and review of a budget is a simulation process
• thumbs up process (according to fararr)

• each number in a budget is a point estimate - single most likely amount
• point estimates are necessary for control puposes
• for planning, a range of probable outcomes may be more helpful
• monte carlo process (thumbs down)
• after a budget has been approved, it is possible with a computer to substitute a probability distribution for each major point estimate.