Budgeting: A Comprehensive Guide for Managers
8) Self-Imposed Budgets
What is a self-imposed budget?
A self-imposed budget is a budget prepared with the full cooperation and participation of managers at all levels. It is also known as a participative budget.
Major advantages of self-imposed budgets:
- Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management.
- Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations.
- Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment.
- A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. With a self-imposed budget, this excuse is not available.
Caution in using self-imposed budgets:
One important limitation of self-imposed budgeting is that lower-level managers may allow too much budgetary slack. Since the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain.
9) Budgeting and Workforce Staffing
The direct labor budget shows the direct labor-hours required to satisfy the production budget. By knowing in advance how much labor time will be needed throughout the budget year, the company can develop plans to adjust the labor force as the situation requires. Companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency.
10) The Cash Budget
Purpose of the cash budget:
A cash budget is a detailed plan showing how cash resources will be acquired and used. It is not simply a forecast of how much cash the company will have in the bank at the end of the year.
Relevant Costs and Differential Analysis
1) What is a relevant cost?
Only those costs and benefits that differ in total between alternatives are relevant in a decision (relevant costs). Distinguishing between relevant and irrelevant costs and benefits is critical for two reasons. First, irrelevant data can be ignored—saving decision makers tremendous amounts of time and effort. Second, bad decisions can easily result from erroneously including irrelevant costs and benefits when analyzing alternatives. To be successful in decision making, managers must be able to tell the difference between relevant and irrelevant data and must be able to correctly use the relevant data in analyzing alternatives.
2) Definitions of incremental cost, opportunity cost, and sunk cost:
- Incremental cost: An avoidable cost that can be eliminated, in whole or in part, by choosing one alternative over another.
- Opportunity cost: The benefit that is foregone as a result of pursuing some course of action.
- Sunk cost: A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do.
3) Are variable costs always relevant costs?
Explain. No. only those costs and benefits that differ between alternatives are relevant costs. 4) “Sunk costs are easy to spot—they’re simply the fixed costs associated with a decision.” Do you agree? Explain. No. A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do. Sunk costs are always the same no matter what alternatives are being considered; therefore, they are irrelevant and should be ignored when making decisions. Future costs that do not differ between alternatives should also be ignored when making decisions. 6) “All future costs are relevant in decision making.” Do you agree? Why? No. only future costs that differ between alternatives are relevant costs. Future costs that do not differ between alternatives should be ignored when making decisions.