PART I
Budgeting is a process or science of creating a proposal to either spend an individual or another party’s resources, such as money. The spending plan itself is referred to as a budget. The three main objectives of budgeting are to set goals for future periods, compare actual outcomes with those that were budgeted for periodically and lastly, to implement the set budgeted strategies to accomplish present objectives. Budgeting is mainly handled in financial aspects as it involves money.
A master budget is a centralized planning tool used in management by teams or individuals to direct the activities of an organization. A planned operating budget is a plot used by organizations to provide a clear picture of how individuals, departments or teams in the same organization will contribute towards achieving organizational objectives. However, a financial budget is a projection of incomes and outflows for periods short and long. Therefore, a master budget is credited to be the backbone for organizational direction. It encompasses both the planned operating budget and the financial budget. Planned operating budgets aid master budgets by outlining each individual’s, team’s or department’s responsibility towards achieving the master plan/budget. The financial budget’s purpose is to quantify the projects as set by the master budget and planned operating budget (Hansen et al., 2009).
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Management by exception concept relates to budgeting in the sense that it highlights to management only serious deviations to a plan. As such, budgets/plans only focus on areas that require action.
A meaningful budget should be prepared off of five principles. They include the principle of annuality, meaning that the best period interval to prepare a budget is one year. A fiscal discipline which asserts that a budget should be well-adjusted as well as possess the capability of congruence between income and money spent. Inclusiveness should be attained in a budget by displaying all the diverse estimates of income and expenditure. The fourth principle is accuracy as, without it, the estimates in the budget would be representing something entirely different. The last meaningful principle is transparency and accountability, which is an indicator and accounts for good governance in an organization.
A budget variance is a difference between a budgeted baseline of an income or expenditure with the actual figures. Organizations prefer favorable budget variances where the actual income is more than the budgeted income, while the actual expenditure is less than the budgeted expense. Therefore, an unfavorable variance is when the actual income is less than the budgeted income, and the actual expenditure is greater than the budgeted expenditure (Hansen et al., 2009). Computing variance in budgeting is variance analysis. It is important to process as it helps comprehend why fluctuations exist and therefore come up with measures to remedy the fluctuations.
A master budget is a financial forecast that contains all budgeted revenues and costs for an organization. It encompasses departmental budgets as the forecast is for the entire organization. A responsibility budget is a financial forecast prepared by managers or departmental heads. They are essential because many managers cannot control the master budget. Therefore, financials for a responsible budget are present in the master budget.
Due to the unfavorable variance in supplies expenses, it does not directly mean that there was an inefficient use of the supplies or that care was not taken in purchasing the supplies. Budget variances are acceptable in budgeting because it is a process of forecasting future expenses and incomes. It is rare for forecasting to be perfect. Organizations normally aim for favorable variances.
Business assumptions in the role of management are made in strategy formulations, planning, budgeting and decision making. They can be generalized as conjectures which are standardized as disclosures of risk and uncertainty. The assumptions surrounding the business environment when making a budget that the business if funded appropriately. Without funding, then the business is not fit to run. It is also assumed that the business will turn a profit if everything goes as budgeted. The other assumption is that the people entrusted with the budget are the right people to run the business.
Budgeted performance is better than past performance on the basis of judging actual results because inadequacies experienced in the past can be factored in a budgeted performance to reveal a close or better than actual performance/outcome. For instance, in past performance, a manager realized that they did not factor in inflation of fuel prizes when they procured supplies from 12,000 miles away. After experiencing an unfavorable budget variance, the manager compensated in the next budget to get a more actual outcome.
PART II
Looking at background information about Kentucky Fried Chicken, it can be noted that the budgeting practices play an important role in facilitating managerial efficiency. KFC is a huge corporate entity with numerous departments. KFC needs to segregate the responsibilities of the departments into budgeting as a means of strategy formulation. Budgeting for the organization gives it standards which performance will be judged upon and also is important in budget control systems. Budget practices in the organization involve using the same standard of spice blend, which gives KFC quality standardization and budgeting efficiency (Segal-Horn & Faulkner, 2010). The number of ingredients that go into one pound of chicken can easily be calculated because of standardization. As much as standardization was sought to achieve uniformity, it played a great role in easing budgeting.
Works Cited
Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: accounting and control . South-Western.
Segal-Horn, S., & Faulkner, D. (2010). Understanding global strategy . Cengage Learning.
