Budget and Budget Committee - Essay Example

Essay Budget and Budget Committee: Budget refers to planning and organizing finances. Businesses especially when launching themselves allocate their financial resources to different things related to the functioning of the business. Hence, a thorough analysis of finances is very essential to the efficient growing and running of any business of committee. Hence, for each business or even any type of group or organization to prosper, it is very essential that its finances are managed carefully. Hence, this requires budgeting which obviously needs a group of people who can sit and ponder over what to spend where ands how etc.

this fundamental task comes under the budget committee’s role. For a business, a budget committee’s formation is absolutely needed. This committee helps in outlining financial goals basically. The committee prepares documents and papers that show the financial position of the organization/business etc it is working for. This visual representation helps in planning out the activities of the business in a much better way. Expected financial results can also be seen through a thorough analysis of past records and events done by the committee.

This preparation of financial documents for decision making can hence be called the main purpose of a budge committee. (Brian Tracy, 2004). A simple budget committee includes four main things or components. These are: - Sales and revenue - Profit or loss - expected costs (total costs) - Total profits thereafter A budget committee sits down and does a methodical analysis of the marketing and sales departments that it works for. By this, it simply is being a group of people all work together to make accuracy and authenticity of data their main criteria.

This is done so that all estimated or projected total costs and the resulting profit or loss from them, are true. This leads to a reliable setoff data to be analyzed and drawn conclusions from. And this serves as a true and accurate set of compiled information that is used by the business (in this case) for decisions making purposes. Usually, for the budget committee to be effective, all data is collected through research by surveys and market analysis. A true budget hence portrays the business’s true worth and potential.

Each budget committee member also makes sure that the budget is appraised and reviewed regularly for instance, every month. This calls for even more timely collection of data and keeps the committee on track with the latest trends in financial costs inclinations. The budget committee hence helps in saving a lot of time and money and keeps the entire business organized. (Brian Tracy, 2004). Flow of a Budget: By, flow of a budget, it is meant how basically a budget is prepared. This calls for an outlining of things that come first or are considered first, when making a budget, second, third and so on.

A budget as mentioned above undertakes many important goals and deals with different types of financial trends, costs, analysis and decision making etc. The stages involved in the flow of a budget are as follows: 1. Sales value (estimated): The first thing that a budget undertakes or includes in itself, is the probable amount of sales in value for the month the budget is being made for. This is based on a complete analysis of the marketing and sales function of the business. Hence, the data involved here is that of number of goods sold, amount spent on advertising and marketing etc.

There are usually written or recorded by a high, medium and low sales tag (estimated sales that is.) 2. Operating Costs: this is the second part of the budget. This illustrates what the business has spent on regular everyday expenses and how much. These costs can be related to the human resource department or even the production or dispatch/delivery department etc. from heating and lighting, to cost of fuel to salaries of employees, all comes under the tag “operating costs”. A budget hence deals with these different costs listed clearly as follows: Costs of buying the service or product Marketing and other Sales costs Administration costs Costs of operation e.g. Lighting expenses Other fixed, variable and semi-variable costs related to business operations 3.

Profit or Loss (monthly): this part of the budget includes the cumulative profit or loss from operations of that month only. This step is useful for the budget committee for analysis purposes that it does later at the end of the year usually to find out the broad trends and inclinations in sales, profit, revenue and losses. 4. Total Profit or Loss: this part contains the cumulative profits or losses for the year or a set of months (quarterly, half-yearly etc.) From this are the breakeven ratios and other business profitability ratios calculated for further analysis of the functioning of the business for that period of time.

We can definitely say here, that this part shows a business’s true latent, or its true potential. (Brian Tracy, 2004). Differences between Traditional Costing and ABC Costing Technique: This section refers to a called analysis for the difference/s between Traditional Costing (TC) and Activity Based Costing (ABC). These differences hence are: 1. Traditional Costing deals with exact figures for example, number of goods sold etc. Hence, all overhead costs are assigned to these. ABC costing however, does this very less, and rather puts the general trend as an allocation basis.

Assignment is not related to the quantity of products. 2. TC allocates all manufacturing or production costs to products themselves. ABC costing allocates both manufacturing and non-manufacturing to products. 3. Direct labour and machine hours are the allocation bases in TC. This base is usually in correlation to the alterations that occur automatically in overhead costs or operating costs that are allocated to the base when using that base. This does not happen in TC. ABC only allocates a cost to the product only if there will be changes in the product cost in the future because of some decisions. 4. ABC against TC uses more cost allocations or pools.

(FMAccounting, n.d.) Important points to remember while selecting Cost Drivers: Cost driver is something that controls the cost relating to a business function or doing. These are a component of the ABC. There are two types of cost drivers. These being: activity driver resource driver (BNET Business Dictionary, n.d.) The question that arises here is what factors to consider when selecting one type of cost driver out of many available. The things to consider are: accuracy acceptable information cost simple to analyze and understand should a combo of cost driver be taken, or one only avoiding complexity, while selecting whichever cost driver (Carsten Homburg, 2002).

Different methods for calculating Payback: Payback period refers to the total time that it will acquire for an amount of money that has been invested in a capital good to come back to the investor. This basically is done through a series of cash flows and which eventually results in an accumulation of the total amount that was initially invested. One way to calculate this payback period is through a formula. This formula is: Payback period = Cost of Investment divided by Annual Cash Flows. (Masego Matseke, n.d.) Other methods of calculating payback period include: discounting cash flows; calculating the annual rate of return; IRR; Risk-adjusted rate of return; Return on Assets; Return on investment etc.

(LearningMatters, 2008). ‘Both Managerial Accountants and Financial Accountants use the data from the accounting system of the firm but for different purposes.’ Financial information is a necessary tool for all businesses to have so that future and current business decisions are based on this information. A financial accountant is a person who undertakes the objective role that financial information carries with itself. This basically means that a financial accountant makes all the financial statements.

His job requires him to present all financial data in a proper format. Hence, he makes all accounts and tables/charts for the managers to see and analyze. An accountant manages and maintains a track for income and expenses, assets, operating costs, returns, loans, debt etc. Accountants handle all this raw data and transform it into a proper categorised data that is presented in the form of information. (QandAs- Legal, n.d.) After all this depiction of information is done in accounts and statements, does the task of a managerial accountant begin.

He is responsible for their leadership placements. They use their administration and management skills to analyze the presented information and base their decision making on this information that is prepared by a financial accountant. These are also called advisors to the business, since they evaluate financial information. Managerial accountants also are part of a product’s for instance, entire stream of work. This includes decisions related to marketing budget, sales budget, promotion expenses, pricing, outsourcing etc.

(Sigel, Gary, 2000). As mentioned above, it is very clear how the two roles differ even though the main element of each accountant’s role still remains the same. There is just a difference in the “sub-s” involved. Works Cited 1. Sigel, Gary. “What do management accountants do?” Strategic Finance Publication. 2000. All Business. August, 17, 2008. http://www.allbusiness.com/accounting-reporting/managerial-accounting/605863-1.html 2. QandAs- Legal. “What does an accountant do?” QandAs. (n.d.) August, 17, 2008.

http://legal.qandas.com/personal-taxes/what-does-an-account-do.html 3. LearningMatters. “Calculating Payback Period”. LearningMatters. (2008) Echelon Learning Ltd. August, 17, 2008. http://www.learningmatters.com/idx/7741/index.html 4. Masego Matseke. “Payback Period”. (n.d.) 12Manage. August, 17, 2008. http://www.12manage.com/methods_payback_period.html 5. Carsten Homburg. “A note on optimal cost driver selection in ABC”. ScienceDirect. 2002. Academic Press. August, 17, 2008. http://www.

sciencedirect.com/science?_ob=ArticleURL&_udi=B6WMY-456JPDV-B&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_version=1&_urlVersion=0&_userid=10&md5=883baf2da051b21acf9381152ac7eeb5 6. BNET. “Cost Driver”. BNET Business Dictionary. (n.d.) CNET Networks Inc. August, 17, 2008. http://dictionary.bnet.com/definition/cost+driver.html 7. FMAccounting. “Difference between ABC system versus traditional based costing system”. Financial, Management and Accounting. (n.d.) August, 17, 2008. http://fmaccounting.

com/difference-between-abc-system-versus-traditional-based-costing-system/ 8. Brian Tracy. “Drafting your budget”. Entrepreneur Connect. 2004. Entrepreneur.com Inc. August, 17, 2008. http://www.entrepreneur.com/money/article72918.html