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Improvement programs Just in Time, Total Quality Management and Business Process Reengineering
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Cost Volume Profit Analysis
Profit Planning
Standard Costing and Balanced Score Card
Flexible Budgets and Overhead analysis
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Decision Making Costs
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Profit Planning and Budgeting

Profit planning is the set of steps that are taken by firms to achieve the desired level of profits. Profit is accomplished through the preparation of a number of budgets, which, when brought through, from an integrated business plan known as master budget. The master budget is an essential management tool that communicates management's plan throughout the organization, allocates resources, and coordinates activities.

Budgeting:

A budget is a detailed plan for acquiring and using financial and other resources over a specified period of time. It represents a plan for the future expressed in formal quantitative terms. The act of preparing a budget is called budgeting. The use of budgeting to control a firm's activities is called budgetary control.

 Master budget is a summary of a company's plan that sets specific targets for sales, production, distribution, and financing activities. It generally culminates in cash budget, a budgeted income statement, and a balance sheet. In short, it represents a comprehensive expression of management's plans for the future and how these plans are to be accomplished.

Planning and Control:

Planning involves developing objects and preparing various budgets to achieve those budgets. Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal. To be completely effective, a good budgeting system must provide for both planning a control. Good planning without control is time wasting.

Advantages of Budgeting:

Companies realize many advantages from a budgeting program. Among these benefits are the following:

1. Budgets provide a means of communicating management's plans through the organization.
2. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many mangers would spend all of their time dealing with daily emergencies.
3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively
4. The budgeting process can uncover many potential bottlenecks before they occur
5. Budgets coordinates the activities of the entire organization by integrating the plans of the various parts of the organization. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
6. Budgets provide goals and objectives that can serve as benchmark for evaluating subsequent performance.

Responsibility Accounting:

The basic idea behind responsibility accounting is that a manager should be responsible for those items that the managers can actually control to a significant extent. Each line item (i.e., revenue or cost) in the budget is made the responsibility of a manager, and that manager is held responsible for subsequent deviations between budgeted goals and actual results. Someone  must be held responsible for each cost or else no one will be responsible, and the cost will inevitably grow out of control.

Being held responsible for costs does not mean that the manager is penalized if the actual results do not measure up to the budgeted goals. However, the manager should take the initiative to correct any unfavorable discrepancies, should understand the source of significant favorable or unfavorable discrepancies, and should be prepared to explain the reasons for discrepancies to higher management. The point of an effective responsibility system is to make sure that nothing "falls through the cracks" that the organization reacts quickly and appropriately to deviations from its plans, and that the organization learns from the feedback it gets by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

Budget Period:

Operating budgets ordinarily cover one year period corresponding to the company's fiscal year. Many companies divide their budget year into four quarters. The first quarter is then divided into months, and normally budgets are developed. These near term figures can often be established with considerable accuracy. The last three quarters may be carried in the budget at quarterly totals only. As the year progress, the figures of the second quarter is broken down into monthly amounts, then the third quarter figures are broken down, and so forth. This approach has the advantage of requiring periodic review and reappraisal of budget data through out the year

Continuous or perpetual budgets are used by a significant number of organizations. A continuous or perpetual budget is a 12 month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focus at least one year ahead.

Participative budgets or Self imposed Budget:

The budgeting approach in which managers prepare their own budget estimates is called self imposed or participatory budget. This is generally considered to be the most effective method of budget preparation. Managers at all level participate and coordinate with each other in budgeting.

A number of advantages are cited for such self imposed budgets.

1. Individuals at all level of organization are recognized as members of the team whose review and judgments are valued by top management.
2. Budget estimates prepared by front line managers can be more accurate and reliable than estimates prepared by top managers who are more remote from day to day activities and who have less intimate knowledge of markets and operating conditions.
3. Motivation is generally higher when an individual participates in setting his or her own goal then when the goals are imposed from above. Self imposed budgets create commitments.
4. If a manager is not able to meet the budget and it has been imposed from above, the manager can always say that the budget was unreasonable or unrealistic to start and, therefore, was impossible to meet. With a self imposed budget this excuse is not available.