SUMMARY OF CHAPTER 9
BUDGET PREPARATION

Nature of Budget
Budgets are an important tool for effective short-term planning and control in organization.
An Operating Budget usually covers one year and states the revenue and expenses planned for that year. It has certain characteristics like: * A budget estimates the profit potential of the business unit. * It is stated in monetary terms, although the monetary amounts may be backed by the non-monetary items like units produce and sold. * It generally covers a period of one year except the seasonal businesses. * It is a management commitment that managers agree to accept responsibility for attaining the budgeted objectives. * The budget proposal is reviewed and approved by an authority higher than the person preparing the budgets. * Once approved the budgets can be changed only under specified conditions. * Periodically, actual financial performance is compared to budget, and variances are analyzed and explained. * The budget is different from strategic planning and forecasting.

Uses of Budget
Preparation of an operating budget has four principal purposes. 1. Fine Tuning the Strategic Plan: * The strategic plan of the last year can help the managers in preparation of the budgets. * And budget preparation also provides an opportunity to make decisions that will improve performance before a commitment is made.

2. Coordination: * Every responsibility center manager participates in the budget preparation process. * Manager’s individual planning is come together here and the inconsistencies may be shown up. * Thus, with the help of this group work the inconsistencies are identified and resolved. 3. Assigning Responsibility: * the approved budget should make clear what each manager is responsible for and with the budgets allocated to