90 11.2 Planning and Controlling Operations
-
-
Last updated
- Dec 28, 2020
Learning Objectives
- Understand how operating budgets are used for planning and control.
Question: If you have established a personal budget, you know the importance of planning to achieve your goals. Assume one of your goals is to purchase a new car. It is not enough to simply state, “I want to buy a new car next year.” If you do not plan ahead for a big expense like this, you may find that you don’t have enough money for a reasonable down payment or that you have very large monthly payments. If you plan ahead, you may see that working some additional hours, cutting back on entertainment, or a combination of both, allows you to buy the car and avoid these problems. Organizations are no different, except their needs tend to be more involved. How do organizations formally plan for the future?
The Planning Phase
Question: How are budgets used to help organizations plan future activities?
-
The Control Phase
Question: How do organizations use budgets to control operations?
Business in action 11.1 – Challenges of Budgeting for International Operations
Companies with operations in several different countries, called multinational companies, face numerous challenges in establishing operating budgets. Most experts agree that foreign exchange rates have the biggest impact on budgeting for multinationals. Specific exchange rates are used when the budget is established. However, these rates can fluctuate significantly and are likely to differ when companies compare actual results with the initial budget. This makes the budget control process difficult because exchange rate variations might cause the differences between actual results and the budget.
Exchange rate fluctuations, along with other market characteristics—such as economic uncertainty and unpredictable government activities—make budgeting for multinational companies a challenging task.
Source: Ken Milani and Juan Rivera, “The Rigorous Business of Budgeting for International Operations,” Management Accounting Quarterly 5, no. 2 (2004): 38–50.
Key Takeaway
Organizations establish budgets to communicate their plans to employees and to coordinate the activities of employees across the entire organization. Budgets are often compared with actual results to evaluate employee and organizational performance.
Review problem 11.1
Why do most organizations prepare an operating budget?
Definitions
- A plan of the resources needed to achieve the organization’s goals.
- A short-term budget (typically one year) that focuses on the daily operations of the organization.
