Budgeting
A budget is a financial plan that outlines the financial goals of an entity. Budgets are important financial roadmaps that allows the management to make projections and plan on managing the available resources to achieve the expected goals.
For internal management, the budget is very helpful in identifying and controlling costs of a company. To identify the costs of future plans, the managers have to make projections of the expected costs, and measure their performance with the actual costs.
Purposes of Budgets
There are different purposes of making or having a budget. The main purposes of budgeting are:
• Planning
• Allocating resources
• Evaluating/Measuring performance
• Managing performance
Budgeting involves the key issues of allocating costs to individual components or activities in the production process. These allocations are made through estimations which require inputs from the supervisors and managers from the respective departments. This is to ensure the allocation of resources is not over-applied or under-applied.
Ethical Issues in Budgeting
When resources are over-applied to a given department or job, they will cause constraints of the available resources to meet the budgets of other departments. As well, when budgets are under-valued, the departments or jobs may underperform or fail to meet the quality and customer expectations. Thus, it is important for the management to ensure cost allocation of resources is as close to the actual costs as possible.
In addition, the management should be aware of the padding of the budget issue. Padding the budget is the overestimating or underestimating costs by the relevant personnel. This is done purposely to reduce pressure and make a given department look better when the actual costs or revenues are compared for performance evaluation.
Padding of the budget is an ethical issue and should be taken into consideration when the financial manager is making a budget. Historical data, and any changes from previous periods' actual costs should be closely examined when making the budget.