Page 108 - Accounting Best Practices

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5–11 Use Flex Budgeting
get year progresses and everyone realizes that those absurd assumptions are, in
fact, not attainable, some of the blame is put on the budgeting process, resulting
in a loss of credibility. This problem is especially common in old, established
industries, where competition is high and low profits are the norm.
Activity-based budgeting is the best solution for companies in this quandary.
To use it, the existing budget model must either be scrapped or used alongside a
new model, which pools all costs into cost centers, assigns these costs to activi-
ties, and charges the activities to products and customers. By using this new
approach, one can see much more clearly the products on which a company
really makes (or does not make) money, and margins on all customers, based on
the services they demand from the company. With this better information, man-
agement can target cost reductions in those areas where there is little return on
the money invested, while targeting expense increases if there is a corresponding
increase in margin. This is a very large topic that requires a separate book to fully
comprehend. For more information, read Driving Value Using Activity-Based
Budgeting, by James Brimson and John Antos (John Wiley & Sons, Inc., 1999).
The biggest problem with activity-based budgeting is that it requires an entirely
new budget model, as well as a new chart of accounts in which to store the budget
information. Both of these changes are significant and require months (and some-
times years) of careful planning and implementation. The reason for all the planning
is that all accounting information systems are designed to feed information into
the existing chart of accounts, so these systems must be modified to accumulate
data in the manner required for the activity-based budgeting system instead. One
way to get around this problem and activate the new system much more quickly
is to keep the old budgeting model and continue to account for it through the
chart of accounts in the traditional manner, manually maintaining the new bud-
geting model to one side and reporting on actual results with a separate system.
Though certainly more labor-intensive, this approach can be implemented at once
and requires very little change in the existing accounting systems.
Cost: Installation time:

5–11 USE FLEX BUDGETING

Perhaps the single most tedious part of updating a budget is altering the myriad
expense line items every time someone makes a change to the estimated revenue
level. Revenue is far and away the most commonly tweaked number in a budget,
so the underlying expenses have to be recast to be in proportion to the changed
revenue levels a multitude of times. This is a major chore not only for the
accounting staff maintaining the budget, but also for those managers who must be
contacted about changes to the expense levels they had previously authorized.
A recasting of the budget model will largely eliminate this problem. Instead
of making changes to the expense line item for every expense in the budget, it is