Section A Other Types of Budgets The disadvantage to zero-base budgeting is that it can require a nearly impossible amount of work to review all of a companys activities every year. As an alternative, a company could schedule zero-base budgeting on a rotating basis, with only a few different departments or divisions being subject to an in-depth review of their activities each year. Continuous (Rolling) Budgets A continuous budget, also called a rolling budget, is one that is prepared for a certain period of time ahead of the present. For example, a 1-year continuous budget will be prepared at the end of every month for the next 12 months. Continuous, or rolling, budgets are discussed in more detail in the topic of Time Frames for Budgets in the Budgeting Concepts section of this textbook. Question 9: The major feature of zero-based budgeting is that it: a) Takes the previous years budget and adjusts for inflation. b) Questions each activity and determines whether it should be maintained as is, reduced or eliminated. c) Assumes all activities worthy of receiving budget increases to cover increased costs. d) Focuses on planned capital outlays for property, plant and equipment. (CIA Adapted) Budget Reports After the budgets are determined and approved, they will be used throughout the year to measure how the actual results compare to the budgeted results. We have referred to the importance of variance reporting throughout this section, but it bears repeating. A budget variance report does this measurement by comparing the actual item (revenues or expenses or units) with the budgeted amount for the same time period. If the company is ahead of the budget (meaning revenues are higher than budgeted or expenses are lower than budgeted) the company has a favorable variance. If the opposite is true, the company has an unfavorable variance. Variance analysis is covered in detail in the Performance Management section of this textbook. If the variances are significant or unexpected, the company must investigate and determine the cause of the variance. Some variances are expected - for instance, if sales are higher than budgeted, then it is only logical that there will be an unfavorable variance in direct materials and direct labor if company uses a fixed (or static) budget for the variance reporting. However, investigating the causes of unexpected variances is one of the most important steps in the budgeting process. This analysis is part of the control loop. The control loop is the process by which the activities of the company are controlled. The major steps in the control loop are: 1) Establish the budget, or standards of performance. 2) Measure the actual performance. 3) Analyze and compare actual results with the budgeted results (this is the budget report). 4) Investigate unexpected variances. 5) Devise and implement any necessary corrective actions. 6) Review and revise the budget/standards if necessary.
Posted on: Sun, 23 Mar 2014 13:52:17 +0000
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