This is an extract of our Relevant Costing Theory Topic2 document, which we sell as part of our Irish Management Accounting Theory Notes collection written by the top tier of University College Cork students.
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PROFIT PLANNING & BUDGETING; TOPIC 2.
Budgeting is future orientated plan, a plan is a means to an end. There are generally standing budget committees whom operate and convert strategic budgets into operational ones to meet goals of the company and to keep the company profitable in the long run.
Generally, these committees are only found in larger organisations.
Objectives of Budgeting:
Compel planning, so firms need to plan for the future and anticipate any foreseeable problems which might arise.
Benchmark performance, responsibility accounting for management.
Motivational impetus, setting targets is a form of motivating, giving bonuses also can be motivational.
Medium of communication, where employees are aware as to what is required of them in the position they hold.
Enhance co-ordination, between different units of the company, to work more efficiently as a full team orientated business.
Promote goal congruence, so need for clear goals and then individuals acting to meet these goals.
Instil financial awareness, management can realise the financial reprecusions for certain things and can become more aware of how to manage to reduce costs.
This budget is a summary of the information contained in the functional budgets
(sales production), it is precise and determines a firms structure by the nature of its output.
It contains three main elements; cash budget, budgeted profit and loss and the budgeted balance sheet.
The Cash Budget:
This budget ensures that sufficient cash is available to meet payments and commitments and is an effective use of surplus cash.
Non cash items (depreciation/bad debts) do not get entered into this budget and as result it is reliable from a cash only point of view.
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