Management Accounting Best Practices: A Guide for the Professional Accountant

Chapter 1

Budgeting Decisions

The most common method for creating a budget is to simply print out the financial statements, adjust historical expenses for inflationary increases, add some projected revenue adjustments, and voila—instant budget. Unfortunately, this rough method ignores a massive number of interlocking factors that would probably have resulted in a very different budget. Without a carefully compiled budget, there is a strong chance that a company will find itself acting on budget assumptions that are so incorrect that it may find itself in serious financial straits in short order.

To avoid these problems, the accountant must determine the proper format of a budget, find the best way to adjust it when revenue volumes change, ensure that the budgeting process is efficient, factor bottleneck operations into the budget, and use it to improve company control systems. This chapter provides answers to all of these key questions. The following table itemizes the section number in which the answers to each question can be found:

Section	Decision
1-1	How does the system of interlocking budgets work?
1-2	What does a sample budget look like?
1-3	How does flex budgeting work?
1-4	What best practices can I apply to the budgeting process?
1-5	How can I integrate the budget into the corporate control system?
1-6	How do throughput concepts impact the budget?

1-1 HOW DOES THE SYSTEM OF INTERLOCKING BUDGETS WORK?

A properly designed budget is a complex web of spreadsheets ...