BUDGETING

Budgeting
Budget is a financial and/or quantitative statement,
prepared to a defined period of time, of the policy to be
pursued during that period for the purpose of attaining a
given objective.---CIMA
A budget is a plan of future activities for an organization.
It is mainly expressed in financial terms,
but also usually incorporates many non-financial
quantitative measures as well.
 Budgeting
• A budget is merely a collection of plans and forecasts, which
expresses largely but not exclusively in financial terms.
• Even though many organizations do not plan formally for
more than a year ahead,
• The annual budget must be set in the context of longer term
plans, which are likely to exist even if they have not been
made explicit.
• Budgets should be a management tool rather than merely an
accounting exercise.
 Budgetary Control
It is the establishment of budgets relating the
responsibilities of executives to the requirements of a
policy, and the continuous comparison of actual with
budgeted results, either to secure by individual action
the objective of that policy or to provide a basis for its
revision.
 Budget Manual
It is a written document which guides the executives in
preparing various budgets. Budgets are to be prepared
keeping in mind the objectives of the organization as
detailed in the budget manual .
Budget manual is “a document, schedule or booklet which
sets out, the responsibilities of the persons engaged in the
routine of and the forms and records required for
budgetary
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control.” CIMA London
Budgetary Control

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 Requirements of a sound budgeting system

1. Clear lines of authority and responsibility have to be established.

2. Organizational goal should be quantified and stated in clear and
unambiguous terms.
3. The system should be accepted by all and be established on the
highest possible level of motivation.
4.The budget control system should provide for a degree of flexibility to
enable more accurate monitoring of managerial and organization
performance.
5. Proper communication systems should be established for
management reporting and information service.
6. Educating the budget process and creation of cost awareness
atmosphere will lead to effective implementation of budgets.
 Advantages of Budgeting
1. Budgetary control establishes a basis for internal audit by continuous
evaluation of departmental results.
2. It economizes on managerial time and maximizes efficiency by resorting to
management by exception.
3. Scarce resources are allocated in an optimal manner and hence, it helps in
controlling expenditure.
4. It forces management to plan ahead so that long term goals are achieved.
5. Effective communication leads to better coordination.
6. It has a motivational impact on the work force.
7. Alignment of individual and corporate goals.
8. It8 facilitates in identifying the areas of efficiency and inefficiency.
9. Variance analysis prompts remedial action.
10. Budget provides a benchmark against which the performance of the firm
and individuals can be monitored.
 Problems in Budgeting
1. Budgets are perceived by the work force as pressure devices, which may
have adverse effect on labors relations.
2. It may not be easy to motivate an uninterested work force.
3. Pressure in the budgeting system may result in inaccurate record keeping.
4. Managers may overestimate costs in order that they will not be held
responsible in future for overspending, what is called budget slack.
5. If targets are not achieved, departments may start blaming each other.
6. Uncertainties can make the implementation very difficult.
7. It may be difficult to align individual and corporate goals.
8 .Sub-optimal decisions may arise when a manager tries to enhance his
short-run performance in a way which is detrimental to the organization as a
whole.
 Budgeting Process
The method by which a budget is prepared generally differs from
organization to organization. In some organizations, budgeting may be a
well organized, well documented procedure while in others the budget
may be prepared in a rather ad hoc and unorganized manner.

1. Specification and communication of organizational objective.

2. Determination of key success factors.
3. Establishment of clear lines of authority and responsibility.
4. Establishment of budget centre's.
5. Determination of budget period.
6. Setting up of a budget committee.
7. Appointment of a budget controller.
8. Preparation of budget manual.
Factors considered in Sales Forecasting:
1. General economic conditions.
2. Industry trends.
3. Market research studies.
4. Anticipated advertising and promotion.
5. Previous market share.
6. Price changes.
7. Technological developments.
 Classification of Budgets
According to time:
 Long term
 Short term budget
 Current budget
On the basis of Function :

12 Operating budgets

 Financial budgets
 Master Budgets
 Classification of Budgets
On the basis of Flexibility:
• Fixed budget
• Flexible budget
Financial Budgets: -
• Cash budget
• Working capital budget
• Capital expenditure budget
• Income statement budget
• Balance sheet budget
 Budgeting
Operating Budgets:
 Sales budget
 Production budget
 Purchase
 Raw material budget
 Labor budget
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 Plant utilization budget
 Manu O/H budget
 Administration & selling expenses budget
Participative Budgeting

Flow of budget data from lower management to top levels.

Budgeting Control Reporting System

Name of Frequency Purpose Primary Recipient(s)

Report
Sales Weekly Determine whether sales Top management and sales
goals are being met manager
Labor Weekly Control direct and indirect Vice president of production
labor costs and production department
managers
Scrap Daily Determine efficient use of Production manager
materials
Department Monthly Control overhead costs Department manager
Overhead costs
Selling expenses Monthly Control selling expenses Sales manager
Income Monthly Determine whether Top manager
Statement and income objectives are
quarterly being met
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Review Question

Which of the following is not a benefit of budgeting?

a. Management can plan ahead.

b. An early warning system is provided for
potential problems.
c. It enables disciplinary action to be taken at
every level of responsibility.
d. The coordination of activities is facilitated.

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Review Question

The essentials of effective budgeting do not include:

a. Top-down budgeting.
b. Management acceptance.
c. Research and analysis.
d. Sound organizational structure.

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Review Question

A sales budget is:

a. Derived from the production budget.

b. Management’s best estimate of sales revenue for
the year.
c. Not the starting point for the master budget.
d. Prepared only for credit sales.

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Review Question

Each of the following budgets is used in preparing the

budgeted income statement except the:

a. Sales budget.
b. Selling and administrative budget.
c. Capital expenditure budget.
d. Direct labor budget.

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Review Question

Expected direct materials purchases in Read Company

are $70,000 in the first quarter and $90,000 in the
second quarter. Forty percent of the purchases are
paid in cash as incurred, and the balance is paid in the
following quarter. The budgeted cash payments for
purchases in the second quarter are:

a. $96,000
b. $90,000
1st Quarter 2nd Quarter
c. $78,000 40% 28,000 60% 42,000
40% 36,000
d. $72,000 78,000

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THANK YOU