BUDGETING

 Budgeting is the various activities within a

company which is coordinated by the
preparation of plans (referred as budget) of
actions for future periods.
 budget is a written financial plan of a
business for a specific period oftime,
expressed in money value.
 Planning the annual operations
 Coordinating the activities of various parts of
the organization and ensuring that part are
harmony with each other
 Communicating plans to the various
responsibility centre managers
 Motivating managers to the strive to achieve
the organizational goals
 Controlling activities
 Evaluating the performance of managers
Why do we produce budgets?

1. To aid the planning of actual operations:

• by forcing managers to consider how conditions might

change and what steps should be taken now.

• by encouraging managers to consider problems before

they arise.

2. To co-ordinate the activities of the organization:

• by compelling managers to examine relationships

between their own operation and those of other
departments.

© 2000 Colin Drury

Why do we produce budgets?

3. To communicate plans to various responsibility centre managers:

• everyone in the organization should have a clear

understanding of the part they are expected to play in
achieving the annual budget.

• by ensuring appropriate individuals are made

accountable for implementing the budget.

4. To motivate managers to strive to achieve the budget goals:

• by focusing on participation

• by providing a challenge/target.

© 2000 Colin Drury

5. To control activities:

• by comparison of actual with budget (attention

directing/management by exception).

6. To evaluate the performance of managers:

• by providing a means of informing managers of how

well they are performing in meeting targets they
have previously set.

© 2000 Colin Drury

 Communicating details of the budget policy
 Determining the factor that restricts
performance
 Preparation of sales budget
 Initial preparation of budgets
 Negotiation of budgets
 Coordination and review of budgets
 Final acceptance of the budgets
 Budget review
 Decisions affecting the budget year will have
been taken previously
 Long-range plan is starting point for
preparation of the annual budget
 Policy effect may include planned changed n
sales mix,expansion or contraction certain
activities
 Manager should aware the top management
policy for implementing the long-term plan
in the current year’s budget
 Sales demand is the main factor that restrict
the performance
 It is possible for the production capacity to
rstrict performance when sales demand is in
excess of available capacity
 This factor tdetermine the point at which the
annual budgeting process should begin
 Volume of sales and te sales mix determine
the level in a company’s operation
 This is the difficult plan to produce because
total sales revenue is depends on the action
of the customer
 Sales demand may influenced by the state of
the economy or the actions of the
competitors
 Preparation of bufget should be a ‘bottom-
up’ process
 It enables the manager to participate in the
preparation budgets and increases the
probability that they will accept the budget
and achieve the budget targets
 Past data may used as starting point for
producing budget
 Changed in the future condition must be
taken into account
 Past data information may provide guidance
for future.
Fig 15.2 An illustration of budgets moving up the organizational hierarchy.

© 2000 Colin Drury

Fig 15.1 An overview of the
planning process

© 2000 Colin Drury

 a set of numerical data that is obtained at
regular periods over time
 it also can defined as a set of data for certain
variable that can describe the upward n
downward movement of the variable over regular
periods of time
 the regular periods of times:
 yearly
 quarterly
 monthly
 seasonally
 weekly
 daily
 FUNCTIONAL BUDGETS
 CASH BUDGETS
 MASTER BUDGETS
 SALES BUDGET
 PRODUCTION BUDGET AND BUDGETED STOCK
LEVELS
 DIRECT MATERIALS USAGE BUDGET
 DIRECT MATERIALS PURCHASE BUDGETS
 DIRECT LABOUR BUDGET
 FACTORY OVERHEAD BUDGET
 SELLING AND ADMINISTRATION BUDGET
 DEPARTMENTAL BUDGET
-ENSURE THAT SUFFICIENT CASH IS AVAILABLE
AT ALL TIMES TO MEET THE LEVEL OF
OPERATIONS THAT ARE OUTLINED IN THE
VARIOUS BUDGETS.
-CAN BE PREPARE QUARTERLY,WEEKLY OR
MONTHLY
-HELP FIRMS TO AVOID CASH BALANCES THAT
ARE SURPLUS TO ITS REQUIREMENTS BY
ENABLING MANAGEMENTS TO TAKE STEPS IN
ADVANCE TO INVEST THE SURPLUS CASH IN
SHORT-TERM INVESTMENT.
 Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.

  Month 1 Month 2 Month 3

$ $ $
Cash receipts
Receipts from debtors
Sales of capital items
Loans received
Proceeds from share
issues
Any other cash receipts
Cash payments
Payments to creditors
Wages and salaries
Loan repayments
Capital expenditure
Taxation
Dividends
Any other cash
expenditure
Receipts less payments
Opening cash balance b/f W X Y
Closing cash balance c/f X Y Z
 ii) Step 2: sort out cash receipts from debtors
 iii) Step 3: other income
 iv) Step 4: sort out cash payments to
suppliers
 v) Step 5: establish other cash payments in
the month
 BUDGETED PROFIT AND LOSS
 BUDGETED BALANCE SHEET
 INCREMENTAL BUDGETING
 ZERO-BASED BUDGETING
 ROLLING BUDGET
 ACTIVITY-BASED BUDGET
STEPS:
1. DETERMINE THE OBJECTIVES OPERATIONS AND
COST OF ALL ACTIVITIES UNDER THE
MANAGER’S JURISDICTION
2. EXPLORE ALTERNATIVE MEANS OF CONDUCTING
EACH ACTIVITY
3. EVALUATE ALTERNATIVE BUDGET AMOUNTS FOR
THE VARIOUS LEVELS OF EFFORTS FROM EACH
ACTIVITY
4. ESTABLISH MEASURES OF WORKLOAD AND
PERFORMANCE
5. RANK ALL ACTIVITIES IN OTHER OF THEIR
IMPORTANCE TO THE ORGANIZATIONS
ADVANTAGES
-TO IDENTIFY AND REMOVE
INEFFICIENT OR OBSELETE
OPERATIONS
-ALL FUNCTIONS ARE REVIEWED
AND REEVALUATED ANNUALLY
FROM ZERO-BASE
-IMPOSES DISCIPLINES IN
ORGANIZATIONS
-IMPROVE THE QUALITY OF
MANAGEMENT DECISIONS
DISADVANTAGES
-HIGH VOLUME OF PAPERWORK
-CALL FOR MANAGEMENT SKILLS
IN DECISION MAKING
-EMPHASIZE ON SHORT-TERM
BENEFITS
-MAY PRODUCE MORE
UNCERTAINTY AND CONFLICTS
• Conventional budgeting is inappropriate for those activities
where
the consumption of resources does not vary proportionately with
the
volume of the final output of products or services.

• For support activities conventional incremental budgets merely

serve as authorization levels for certain levels of spending.

• Incremental budgeting results in the cost of non-unit level

activities
becoming fixed.

• ABB aims to authorize only the supply of those resources that are
needed to perform activities required to meet budgeted
production
and sales volumes.
© 2000 Colin Drury
• The ABB process is the reverse of the ABC process:

Budgeted output of cost objects

Determine the necessary activities

Determine the resources required for the budget period

© 2000 Colin Drury