Academic journal article Journal of Accountancy

Make the Move to Dynamic Forecasting

Academic journal article Journal of Accountancy

Make the Move to Dynamic Forecasting

Article excerpt

Is your budget obsolete in two months? The traditional corporate budget process focuses on what managers are allowed to spend to accomplish their goals and not what resources they require. Budget plans can be costly to prepare, starve departments that have valid needs, incorporate last year's inefficiencies and fail to identify waste and respond to a business' strategic objectives. However, CPAs can encourage companies to develop more realistic, dynamic budgets based on predictive planning. One way to do this is to use activity-based costing (ABC)--basing company plans on fluctuating needs related to demand rather than on historical data.

Here are some budgeting tips to keep in mind that incorporate ABC principles.

[] Don't limit yourself to the current situation defined by predetermined spending limits. Begin the budget equation with the outcomes you expect--profit, for example--measured against customer and management demands that vary in mix and volume over time. Don't let your budget stay frozen; revisit it as needed in response to marketplace conditions.

[] Budget management and cost management are not synonymous, so don't confuse them. Formulate budget strategies according to two questions: What should we be doing, and how should we do it?

[] Then inject costs into the equation. Using activity-based-cost estimating helps you relate what-if scenarios over time to the overall impact of expenses on the organization. For example, are you going to open a new warehouse? To estimate the level of spending required in the future, you should match future capacity (what's currently available vs. what's required) with estimated needs (forecasted customer demand).

[] Activity-based-cost management is not a replacement for general ledger accounting. But if your general ledger software does not convert spending into useful managerial information, use an ABC model--based on resources, work activities, process costs and final cost objects--to reflect market, product, service-line, channel and customer-oriented decisions.

[] No one knows in advance how simple or complex a company's first ABC model needs to be. Many financial managers make the mistake with their initial ABC system of plugging in too many details before the user learns how to apply the data or what the accuracy requirements are. …

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