Essay Example on Budgeting in Businesses

Explain and provide an example of each step of the five-step decision making process.

The first step involves identifying the problem and uncertainties. The proper definition of the problem is significant since decision-making is meant to find the solution of the problem. For example, if the problem is triggered by decreasing profits in a firm, the problem here should be identified and mentioned as it is. Whether it is the incorrect pricing policy, poor management relations or obsolete technology, the true cause of the problem should be established from the various sampled possible causes. Once the reason or source of the problem has been detected, the problem then should be identified and properly defined. The second stage involves obtaining information that is sufficient enough to allow the cost accountant to establish various possible outcomes. Third, the cost accountant has to be involved in making predictions regarding the future. He/she can do this by using historical information and the present viable alternatives to accomplish this.

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The second last stage would involve making decisions by correctly choosing among a variety of alternatives. This requires proper consideration of the variables that have a direct impact on the problem that was already defined. The cost accountant will thus ensure that the relationship amongst the identified problem and the key variables has been established. This will be followed by keen evaluation of the alternative courses of action regarding the problem that was already identified. The final step would involve implementing the decision, proper evaluation of performance and drawing certain learning benchmarks that can be adopted for future use (Zimmerman, 2011).

Describe a master budget and the benefits of establishing one in a business.

A master budget refers to an aggregation of all lower level budgets that are generated by a firms various functional areas, and comprises of a financing plan, a cash forecast, and budgeted financial statements. It is usually presented in a quarterly or monthly format, covering the firms entire fiscal year. In this special kind of budget, a detailed explanatory text is sometimes included, to give an explanation of the companys strategic direction, the actions of the management needed to accomplish the budget, and how this master budget will assist in fast accomplishment of specified goals. The reason the master budget is prepared is because it acts as the central planning tool used by the management to coordinate and direct the activities of the entire company. It is through the master budget that the company managers are able to judge and credit the performance of several responsibility centers. The management team is expected to review various reiterations contained in the master budget and later integrate necessary alterations until the management has arrived at a budget that seeks to allocate proper funds to attain the desirable outcomes.

What are the main differences between static and flexible budgets? Provide one example of each type of budget.

The first difference between the two is that a static budget is not altered following the actual bulk of the output attained, while a flexible one changes following the level and height of activity accomplished. Secondly, the static budget can never be relied on in ascertaining costs properly in situations where alterations in circumstances, whereas a flexible one can be used in ascertaining costs in a variety of activity levels. In terms of determination of cost, a static budgeting should be prepared following the number one supposition that all the underlying conditions should remain unchanged. On the other hand, a flexible budgeting should be prepared at different activity levels by giving a consideration to the possible changes in terms of operational aspects of the business.

In terms of assumptions, a static budget has a restricted application and can sometimes be ineffective as the main tool for cost control while a flexible budget has a multitude of applications and serve as an effective tool for cost control. It must be remembered that a static budget is prepared without necessarily classifying the costs in accordance with their true variable nature. On the other note, a flexible budget should be prepared by classifying the costs in accordance with their true variable nature (Horngren, 2002).

To illustrate using an example, it can be said that flexible budgets are designed to account for the flexibility of expenditures that allow the reallocation of funds. Contra wise, static budgets do not allow this kind of reallocation. As a principle, flexible budgets aid in adjusting expenses in static budgets.

Explain the main features of Cost Volume Profit (CVP) budget does not chain analysis.

Cost-volume-profit analysis is meant to determine how certain changes in both volume and costs pose an effect on a firms net income as well as its operating income. CVP analysis requires that every firms costs- inclusive of administrative, selling, and manufacturing costs- be identified as fixed or variable. CVP assumes that all units being produced are all sold; that total fixed cost, variable cost per unit, and sales price per unit are all constant; and that all involved costs are categorized as either fixed or variable.

Summarize the concept of cost objects and explain how cost objects are used in the overall cost management process.

A cost object refers to a product for which a cost is compiled. In activity-based costing (ABC), cost objects are utilized as the central point of cost accumulations. It is prudent for a company to have a cost object to allow proper derivation of pricing from a baseline cost, to determine if the costs are all reasonable, and finally to derive the full cost of the relationship between the firm with another firm. Through cost objects, a company will be able to accurately describe everything to which costs are assigned (Horngren, 2002).

References

Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.

Zimmerman, J. L.-Z. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.