What are the Various Steps in Preparation of Budgets

The process of budgetary control can be reasonably divided into two steps-preparation of budget and secondly implementation of the budget programme. The preparation of a budget can studied both as an accounting process and as a management process. From accounting point of view, it involves the use and application of basic financial accounting techniques. From management standpoint, the budgeting process is closely associated with the operations of the business and its organization structure. Its effectiveness, to a large extent depends upon the organizational efficiency.

Steps in preparation of budgets

The shape and design of budgetary control system is largely determined by the size and nature of the business organization, an effective budgetary control system can be organized on the following lines :-

(1) Creation of Budget Centers : The first step in the budget preparation is the creation of budget centers. A budget centers is a section of the organization of an undertaking defined for purposes of budgetary control. Generally different departments organized on the basis of functions from budget centers and departmental heads work as responsibility center. For example, production budget.

(2) Provision of Adequate Accounting Records : An efficient budgetary system requires the provision on appropriate and adequate accounting records also. A ‘chart of accounts’ corresponding with the budget centers should be maintained in order to help in preparation and analyzing information.

(3) Setting the Guidelines : The next step in the preparation of budgets is setting the guidelines. It is mainly concerned with determining management policy with regard to range of products, stock levels, channels of distribution, investment policies etc. Besides, it also requires that all people connected with budget preparations must he educated in the general techniques of budgeting process. They must be well acquainted with the targets fixed individually for them and with the over all budgetary goals of the whole enterprise so that hey may be conscious of their role in the accomplishment of the targets.

(4) Preparation of organization chart : An organization chart should be prepared which must define the functional responsibilities of each member of the management team. This chart will help each man to know his position in the organization hierarchy as relationship to other members.

(5) Establishment of a Budget Committee. – In very large organizations, a budget committee may be created under the charge of a budget officer or the Director of Finance. This budget committee will prepare, review, discuss and co-ordinate budget activities in the organization. The various departmental heads will be members of this committee and they will prepare initial estimates for the budgets of their respective departments. Then these budgets will be reviewed and coordinated by the budget committee. A good budget is the result of combined skill of the executives responsible for their own particular phase of the activities of the organization.

(6) Preparation of Budget Manual – To systematize the budget procedure and provide the necessary guidelines for the preparation of various budgets a Budget Manual can be prepared. According to I.C.W.A, England. “A budget manual is a document which sets out the responsibilities of the persons engaged in the routine of and the forms and records required for budgetary control.”

A budget manual can be prepared as and maintained in a loose leaf form so that necessary alterations, and when required, can be incorporate in it easily. This manual would include such matters as the following ~the functions and responsibilities of various members of the budget committee, the objects and description of the budgetary control system, statement of the steps in the preparation of a budget, the procedure of
preparation and modification of various accounting records for the budget period etc.

(7) Length of the Budget Period – There is no definite rule as regards the duration of a budget period. The majority of companies prepare budget once a year. For control purposes, the annual totals may simply be divided by 12 to obtain monthly budgets, but if seasonal fluctuations are important, separate budget estimates should be made for each month or the season. Well established business houses often prepare 5 to 10 year plans as well as annual budgets. Long-term budgets facilitate the handling of future problems with due care and consideration as problems can be anticipated long before they appear and sufficient time is available for resolving them. But longer the period of budgeting the less reliable will be forecasts and estimates. Hence, to get the maximum advantage from budgeting the policy of rolling budgeting should be followed.

Under the practice of rolling budgeting, the company prepares a new budget every quarter, but for a full year ahead. Every three months the estimates for the quarter just completed are dropped, the figures for the succeeding three quarters are revised necessary, and estimates for the fourth succeeding quarter are added. This is called a Rolling Budget.

(8) Determination of the ‘Key Factor’ — Key-factor is also known as a Limiting Factor, ‘Governing Factor’ or ‘Principal Budget Factor’ also According to I.C.W.A., England-

This is the factor the extent of whose influence must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfillment.

A key factor dominates the business operation as to present obstacles in the achievement of the budgeted targets. Therefore, it becomes necessary to assess its impact right in the beginning of the budgetary process. Though sales are generally the key factor for other functional budgets, other factors of production, like materials, labor, equipment, management etc. may also be the key factors.

(9) Laying Down the Level of Activity – It is also essential to establish the normal level of activity; i.e. the level of the company can reasonably be expected to achieve. The determination of the level of activity is very important in planning production as well as controlling the costs. To be effective as a technique of control budgeting must provide for necessary allowance to be made in the budget figure and suggest what the figure should have been with the level of activity actually attained.

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