Planning for Operating Excellence
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CHAPTER Budgeting The Planning and Control Process This chapter looks at th e development and use o f the operat ing budget. This is management s plan of action in th e short te rm, usually one year. The operating budget includes all expensed production costs (i.e., all costs report ed as cost o f goods sold) but does not include expenditures on capital equipment, which a re usually justifie d using discounted cash flow techniques. OBJECTIVES ,,,,---.. \ .... Budgets are used for planning, motivation, and control. Objectives of budgets-.. XC - 1 Planning Th e budget is the formal pla n of action The budget details the neede d resou rcesand expected cash flows 2 Motivation The budget acts as the standard aga inst which actual performance is measured 3 Control The budget allows managers to dir ect specific actions Controll able costs must be distinguished from noncontrollable costs Planning The budgeting process begins with the determination (by management) of the firm s anticipated products, prices, production volumes, and other busi- ness factors for the upcoming ye ar. These decisions and parameters are turned into a formal plan of action that describes the activities and resources necessary to achieve these goa ls. This plan, termed th e budget describes the mag nitude and t iming o f cash flows that may be expected for the business. This is important for cash and profit planning. The process o f developing the budget forces the firm to examine the feasi- bility o f its goals an d its ability to coordinate its different activities to achieve these goals. Management recei ves an integrated picture of the effects o f its decisions on the overall firm. When developed for use as a planning tool, budgets are generally static- they a re devel oped using a single level o f act ivity each period (for mining firms, typically a specified production volume each mon th). Multiple sce- narios are often examined by preparing a budget for each individual scenario.
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