Bus 247

Ch 9 – Budgeting

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Budgets
 Forecasts of future revenues and expenditure
 Used for Planning and Control

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Planning and Control
Planning – Control –
involves developing involves the steps
objectives and taken by management
preparing various that attempt to ensure
budgets to achieve the objectives are
these objectives. attained.
Responsibility Accounting
Managers should be held responsible for those
items — and only those items — that
the manager can actually control
to a significant extent.
Someone must be held responsible for each cost
or if no-one is responsible, the cost will
inevitably grow out of control.

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Participative Budgeting
 A method of preparing budgets where
Managers prepare their own budgets.
 These are then combined to make up the
budget of the Organization as a whole
 Managers are more likely to be happy with a
budget if they have had input into their own
budget.

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Master Budget
 Summarizes the financial projections
of all of the organization’s
individual budgets
 There are many steps to compiling
such comprehensive budgets.

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Master Budget is made up of:
1. Sales Budget
2. Production Budget (in units)
3. Direct Materials Budget (used or to be purchased)
4. Direct Labour Budget
5. Manufacturing Overhead Budget
6. Ending Finished Goods Inventory Budget
7. Selling and Administrative Expense Budget
8. Budgeted Income Statement
9. Budgeted Balance Sheet
10. Cash Budget
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1. Sales Budget
 Starting point for the budget
 Calculated as:-

Units to be sold * Selling Price

 Information would be obtained from
many sources, such as:
Sales Staff
Marketing Researchers etc.
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2. Production Budget
Beginning + Units to be = Units to be + Ending
Balance Produced Sold Balance

Need to carefully plan the inventory balances.

You don’t want too much inventory, but too little
may mean lost sales.
(A Merchandising Company would have an
Inventory Purchases Budget rather than a
Production Budget)
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3. Direct Materials Budget
Beginning + DM to be = Units needed + Ending
Balance Purchased for Prodn. Balance
DM DM

Once the DM to be purchased is calculated,

this is then translated from kilograms or
metres etc into dollars (to calculate how
much the purchases will cost)
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4. Direct Labour Budget
Number of units to be produced
*
Hours required per unit
*
Hourly rate

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5. Overhead Budget
 Overheads separated into Fixed and Variable
 Then calculate a rate (or rates) for each of
them or for overheads in total
(if not separated)
 Fixed overheads are usually tied to
capacity rather than level of activity
 Variable overheads are usually tied to the
level of activity
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6. Ending Finished Goods Inventory
Budget
 This is a budget showing the dollar amount of
cost expected to appear on the balance sheet
for unsold units at the end of the period
 Calculated as:
DM, DL and O/H to make one unit
*
Budgeted number of units in Ending Inventory
(from Production Budget)
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7. Selling and Administrative
Expense Budget
A detailed schedule of planned
expenses that will be incurred in
areas other than manufacturing
during a budget period.
Would also be divided into variable
and fixed components.
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8. Budgeted Income Statement
 One of the key schedules in the
budget process
 Is prepared from the data developed
from schedules 1 –8 (above).

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9. Budgeted Balance Sheet
 Developed by beginning with the balance
sheet for the fiscal period just ended, and
adjusted for data contained in the other
budgets.

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10. A Cash Budget
 Comprised of four sections
 Receipts Section – a listing of all cash inflows,
except for financing in the period
 Disbursements Section – all cash payments that are
planned. Eg Raw Mats, DL, Man O/H etc, also
Equipment Purchases, Dividends etc.
 Cash Excess or Deficiency Section – shows the
balance in Cash after Receipts and Disbursements
 Financing Section – shows if financing is required
or whether loans can be paid back
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Flexible Budget
 Master Budget gives a Static Budget which is a
budget for one level of production
 But if actual production is different from this, it
makes little sense to compare costs for a different
level of production so a Flexible Budget is created
 A Flexible Budget is a budget that provides
estimates of what revenues and costs should be for
any level of production within the relevant range
(usually the actual level of production).

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Flexible Budget Variances (cont)
 Flexible Budget variances can be calculated
between the:
 Actual revenue figures and the Flexible
Budget revenue figures &
 Actual expense figures and the Flexible
Budget expense figures
 Variances are favourable (increasing income)
or unfavourable (decreasing income).
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