Abstract
This chapter discusses the process of budget planning for an organization. The process of constructing the budget requires drawing together a wide range of sources information on technological capabilities, marketing opportunities, and resource availability. The coordination of the activities of the many subunits of the organization is achieved through the budget planning process. The planning process is modelled as an iterative exchange of information between the subunits, possessors of detailed knowledge of potential activities, and an accounting office that is responsible for producing the budgetary allocation of organizational resources. Budget planning processes are studied by a price guided mechanism. In this process, transfer prices, P, are established for the organizational capital. These transfer prices reflect the value of the resources to the organization, not the fair market value or replacement costs. Such accounting prices are used solely to guide the budget process toward the most profitable use of organizational capital and are changed throughout the iterative process as the accounting office builds successively better approximations of the decision elements.
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