Your new job is being an engineering manager in a division of the large firm. One of your first responsibilities is to prepare and submit a budget for next year's departmental expenses. Included in the expense budget are office and maintenance supplies, travel, education, and hospitality. You look at last year's budget and see $50,000 was requested but only $45,000 was approved. In looking at the expenditures to date, your notice that, with three months remaining in the fiscal year, you still have $20,000 left in the expense account. The budget request is due in two weeks. You decide to ask manager from other divisions how they go about preparing their budget submissions. The manager at the Greenville Division tells you that he always submits 10% more than last year's request. She comments that they always cut you about 20%. The manager at the Newtown Division tells you that he tries to figure out where he will be with his expenditures at the end of this fiscal year, then estimates 15% higher for the next year. He says his first year he really had to scramble to cover his expenses because he only asked for what he thought he needed and they gave him 15% less. The Boston Division manager says that he has all his personnel submit a "wish list" of items to put into the expense budget. He puts in for the whole amount, but tells his employees not to expect everything on the list. He also tells you that he always makes sure to be slightly over budget in any given fiscal year so that he can justify increasing the budget for the following year. He emphasized that if you don't spend all that you are given in a budget year, that they will probably give you even less the following year.
Respond to this scenario.
Managerial accounting is an interpretation of financial data for the purpose of organizational use. It is translated in order to make better management decisions by identifying, analyzing, and measuring the company performance to the pursuit of its objectives.
Answer and Explanation:
Even in smaller entities, it is necessary to make the financial matters sounded; that is why it is essential to have a departmental budget. It's critical to have a budget as a guide throughout the year, based on it you can make sure the company is not depleting cash flow for the following year. For those that handle the management role without any formal training on creating a budget are required to refer to the past budget in order to get an idea relative to the expenses necessary for the current year. This will provide transparency on paid expenses and help monitor the trends in sales within the past two years. This will also help the management in making better decisions on spending and force them to work within the allocated budget.
For new managers or employees, seeking assistance will eventually help you to make better decisions during the budgeting process, but submitting 10% more based on the budget of last year is not a strategic way of crafting a budget. It's inappropriate for the managers to take the last year's actual expenses and add 10 percent to next year's forecast without any proper supporting reason. In this case, the manager should start with developing a strategy and goals, then determine the resources required to achieve those goals. Additionally, sharing the process of budget preparation with your staff is also useful to ensure that everyone is on the same page. In another word, if you include your team during the decision process, not only this will improve their overall understanding of the process and they will also feel a sense of belongingness; thus, employees will help to achieve the company's objectives.
Learn more about this topic:
from Business Management: Help & ReviewChapter 9 / Lesson 1