Accounting Budgeting the Traditional Role of Budgeting Research Paper

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Accounting

Budgeting

The traditional role of budgeting combines the need for planning and the development of a framework which can be used for control. This is achieved through the gathering of figures for the expected or desired revenue generation and the expected or desired outgoings associated with the generation of that revenue (de Waal et al., 2011). Two major forms of budget exist for commercial organizations; capital budgeting and operating budgets, the former deals with large long-term projects and investment, whereas operating budgets deal with the everyday operations of the firm or department (Horngren et al., 2010). It is usual for budgets to be prepared in advance of the period in which they will be applied, gathering the relevant information in order to create a budget. The most effective and potentially accurate budgets are those which have accurate input information, which often means consulting with relevant managers involved in the operations (Chenhall and Brownell, 1988).

The starting point for gathering information is to ensure the staff knows what is needed; if they know why it is needed and how it will be used, evidence indicates greater effort will be placed in the process, as well as the process having the potential to enhance the employment relationship due to the participation (Chenhall and Brownell, 1988).

The budgeting process is likely to start with the collection of different revenue and cost figures. In a sales department, the sales manager may look to each of the sales teams to provide them with the figures that are needed. The department manager will then utilize the figures that are provided as part of the creation of the departmental budget.

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The first consideration may be sales revenues that will be generated. A good starting point for any the sales managers is usually the collection of the previous years sales figures, and an estimate of the current year sales figures based on current performance (Horngren et al., 2010). Examining the current year against the previous years may indicate the degree to which sales have been changing, even increasing or decreasing, and the level of the current year will provide a basis for the future projection (Horngren et al., 2010). It is important that any estimate is based on factual analysis, especially when considering a sales team, in which sales managers may be overoptimistic about their ability to perform in the following year. The managers will each need to identify previous levels of sales for their team, and use this to identify the expected level of sales performance for their sales team in the forthcoming year. The assessment for the forthcoming year will also need to take into consideration any current, or expected environmental conditions. For example, the company may face a decrease in demand if there is a recession or increased competition, or may expect a larger average increase if economic conditions are favorable other companies making a large investment to support sales.

The sales figures will be utilized by the head of department as the basis for the sales budget. The input of the individual sales managers will be important,….....

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