Page 888 - Accounting Principles (A Business Perspective)

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If the planned operating budget does not show the desired net income, managers must formulate new operating
plans and develop a new budget. The purpose of preparing a planned operating budget is to gain some knowledge of
the results of a period's activities before they actually occur.

A company seldom operates at the level of operations assumed in preparing the planned operating budget. After
the company knows the results of actual operations, management compares actual expenses with budgeted
expenses at the actual level of operations. To facilitate adjusting the budgeted items to the actual level of operations,
management sometimes prepares in advance flexible budgets for the entire operating budget or for certain
expenses. The next section discusses these flexible operating budgets and shows how companies prepare budget
variances.
Early in the chapter, you learned that a budget should be adjusted for changes in assumptions or variations in

the level of operations. Managers use a technique known as flexible budgeting to deal with budgetary adjustments.
A flexible operating budget is a special kind of budget that provides detailed information about budgeted
expenses (and revenues) at various levels of output.

A broader perspective:
Planning in a changing environment

Few industries have changed as much in the past decade as the telephone industry. The old-
fashioned phone company monopoly is over; it now faces intense competition from new
technologies ranging from wireless telephones to free audio and video calls over the Internet. Many
people no longer have land line phones and only use wireless phones. Indeed, the industry has been
transformed by rapidly changing technology and accompanying changes in consumer behavior.
Verizon Communications, Inc. provides telecommunications services. Its old approach to planning
and budgeting was not dynamic and creative enough to deal with the new competitive environment.

To start thinking about planning in the new environment, the company's managers met to discuss
the company's basic values. These managers developed such values as respect and trust in each
other, excellence, profitable growth, individual fulfillment, and integrity as the foundation for the
company's goals and plans. Management then established corporate goals along the lines of these
values, such as profit growth goals, and goals for achieving excellence in customer service, taking
the changing competitive environment into account.
Employee participation in setting goals, planning, and budgeting has been key to Verizon
Communications, Inc. in communicating corporate values and goals. To communicate the
company's goals, top management wrote down the company's basic business problems and the

steps they wanted to take to solve these problems. This action put Verizon's goals in terms that
employees could understand. After this communication step, employees knew better how to relate
their day-to-day work activities to the big picture, namely, ultimate corporate objectives.

Accounting Principles: A Business Perspective 889 A Global Text