Operating Budgets PaperNovember 10, 2017
While discussing budgets, there were two that proved to stand out that I want to explore; Line-late Budgets and Zero-Base Budgeting. Companies use line-item budgets most because they are one of the most popular forms of budgets to use. Ellen-late budgets use Information based on the previous fiscal year or period. This format shows everything going out (spending) of the organization. Line by line things are, “increased or decreased based on present financial conditions, future goals, current and future financial conditions, and the current year’s profit and loss information” (Scott, Michael. 011, p. , Para. 2). Any type of spending that the organization does is contained within this budget for example; labor and benefits. Labor and Benefits Each employee’s salaries, overtime, pension, Insurance such as medical and dental, and contract labor are figured into the budget. An example of salaries, overtime and contract labor being integrated into the budget is the Goodyear Tire and Rubber Company in Layton, Oklahoma. My husband started working for Securities Security Company out of Oklahoma City, Oklahoma. They contract their security officers to Goodyear.
One afternoon my husband explained to me that they ay not receive their raises next year because they had too much overtime this year. They watch how much over time is occurred and they base their next years wages on that (Hint, 2010). This is Just one example of how the line-item budget works with these expenditures. Basing information from the previous year the company can budget in everything purchased and what they will need. Personal needs such as equipment and supplies hold the majority of the lines in the budget.
Equipment such as vehicle maintenance, radios, badges, CATV, and flashlights are needed for the officers to do their Jobs thoroughly and safely. Supplies such as paper, videotapes, batteries, and miscellaneous stuff around the office are also put into the budget. Being able to have some flexibility in the budget is good for the things that are unforeseen, like vehicles that break down, equipment that needs to be replaced or upgraded, and overtime pay for the officers. Strengths and Advantages are to prepare and how detailed planning and comparison of the previous fiscal period is shown (Tossed, 2004).
It is simple to understand and easy to use. “As each item is on a separate line, cutting certain items is easier to do than in other budget aromas” (Tyler & Willard, 1997). Comparing the prior budget to the current one will give the person who is building the budget for the next fiscal year an advantage. The easy to understand format of the line-item budget is ideal. Weakness and Cons One thing that I have noticed while studying the line-item budget is that it mainly seems to focus on the things to be bought by the company.
The big picture or the intended goal is not focused on. There is not any connection between the company’s request, objectives or their Zero-Base Budget The second budget that I looked at is the zero-base budget. Zero-base budgeting makes it easy to monitor and control spending by letting the managers prioritize their budget needs. Unlike the line-item budget, the zero-base budget provides no baseline to go by. This budget, “focuses on what should be done and the best methods of doing it” Monsoons, 2005, p. 9, Para 6). There are a few steps to go by when using the zero-base budget.
The first step is to be realistic when making the budget. Make sure that everything is put into the budget is a need and something that will benefit the company not hinder it. Make sure that every department has the sources that they need to meet the goals of the budget and company. Johnson states that managers need to break the company into sections and study what each individual department needs. The managers need to search out the objectives of each of these departments and reserve different sections of the budget for these departments.
The sections in the budgets for these departments will show what money should be priority when making a decision about the budget. When using the zero-base budget there are decisions to be made that could be good, bad, or even worse for the company. Determining objectives for each department of the company, and which objective is the most important for them can help by making sure to prioritize the money for each department and to determine what is more important for that department and the company as a whole.
Some of the strengths of the zero-base budget are the ways it pays attention to the past, present, and future budgets. This type of budgeting lets the managers add or take away items that may not be cost-efficient for the company anymore or something that the company does not need anymore. One weakness of the zero-base budget is that t eliminates the line-item budget. With the zero-base budget everything is accounted for. Things that are no longer feasible for the company do not receive funding anymore.