Chapter 7: Introduction to Budgeting

Study Guide Highlights

Purposes and budgeting cycle

Budgets support planning, control, coordination, communication, motivation, evaluation and authorisation, but those purposes do not always pull in the same direction. Budgeting sits inside a continuing management cycle in which objectives are set, plans are implemented, actual results are compared with expectations and significant differences prompt action. It is therefore an ongoing organisational process rather than a once-a-year spreadsheet exercise.

Responsibility and controllability

Responsibility accounting links performance information to the managers who can influence it. The chapter distinguishes cost, revenue, profit and investment centres and examines what managers should reasonably be held accountable for. Direct and indirect costs are considered, along with the role of budget committees, budget accountants and senior management. The central qualification is controllability: performance measures should reflect the authority actually available.

Participation and budgeting methods

Top-down and bottom-up participation create different benefits and risks, including acceptance, information sharing, budgetary slack and perceptions of fairness. Rolling, incremental, zero-based, activity-based, priority-based and contingency approaches are also compared. No single method is presented as universally best; the appropriate choice depends on the organisation's circumstances, the purpose of the budget and the stability or uncertainty of its environment.

Uncertainty and budget revision

Budgets rest on planning assumptions that can change. Models, reforecasting, revised budgets and rolling approaches are considered as ways of responding to uncertainty. Revision is not treated as an automatic response to any adverse result: management needs to understand what assumption changed, whether the change is material and whether it lies outside the manager's control before deciding that the original budget should be rebuilt.