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Major Factors Influencing the Budgeting Process

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  • 0:04 What Influences the…
  • 0:59 Organizational Structure
  • 1:58 Responsibility Centers
  • 2:58 Cost Centers & Profit Centers
  • 4:08 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

A great deal of work goes into preparing a budget. In this lesson, we'll look at influences on a budget, ranging from how the structure of the organization affects the process to the role of responsibility centers.

What Influences the Budget Process?

A company's budget doesn't just magically appear. Hours of work go into making it the best document that it can be and many things influence the process. Different departments within an organization jockey for pieces of the budgetary pie, and different priorities within a company receive varying amounts of support. But what about the meat and bones of the budget process itself? How do we decide which groups get line items in a budget? And how do we decide how much to spend on each group that we identify? Clearly, making a budget takes quite a bit more work than just scribbling some numbers on a piece of paper or balancing a checkbook.

In this lesson, we're look at some influences on the budget process. We'll start by examining the role that organizational structure plays in the budgeting process, and move on to explore why classification as a profit center, cost center, or responsibility center matters.

Organizational Structure

Organizational structure is how a company is composed. There are two approaches to budgeting that are controlled by organizational structure. The first of these is a top-down approach. In this case, a company's upper management dictates exactly how much money should be spent by each part of the organization. This has some obvious advantages and disadvantages. First, there is the very real chance that upper management could give your department more money than you would have otherwise thought to ask for. This might mean that you could operate under budget or that you could expand your operations. However, the top-down approach could also leave little room for negotiation if you see something that corporate doesn't.

On the other hand, there's the bottom-up approach to budgeting. This is when departments get to submit their budgets to upper management for approval. Obviously, this allows department heads to have more latitude with their work. However, it also slows down the budgetary process, as well as leaves room for some to complain of favoritism.

Responsibility Centers

So where is all this money going? Businesses have responsibility centers that are the recipients of budget items. A responsibility center is a part of a business that has a manager and its own clearly defined goals. For example, a company's accounting department is a responsibility center, as is its human resources department. By using responsibility centers as the focal point of budgeting, companies are able to clearly state what they expect in return for the money they assign. For a manufacturing division, it might be a certain amount of production. For an accounting department, it might be keeping the books balanced. In any event, the manager of each responsibility center is ultimately the one responsible for the performance of that area.

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