Intro to Budgeting
A substantial tool for planning & Control
Learning Objectives
After study this chapter, students should be able to;
1. What budget is.
2. Discuss budgeting as a tool for planning, controlling, and
decision making processes.
3. Understand implementation of budget
4. Explain different types of budgeting
An Overview of Budgeting
 Careful planning is an important activity for the health of any
organisation, both profit and non-profit making organisations.
 Failure to plan, either formally or informally, can lead to financial
disaster.
 Management determine the resource capabilities within a business
and have a plan that specifies the use of these resources (resource
planning). It is this activity that starts a budgeting – a specific resource
planning module.
What is Budget?
 Budget is a forecast/plan for a defined period regarding a
company’s resources (money, materials, employees, time, etc..)
to achieve set goals.
 Budgeting involves the planning of sales volumes and revenues,
material quantities, costs and expenses, assets, liabilities, cash
flows, capital expenditures, etc...
 Budgeting gives meaning to the role of planning, controlling, and
decision making regarding the affairs of a business;
 where through budgeting, it enables a business plan on how to use its
resources and to achieve set goals,
 Budgeting gives a sense of control on resources of a business as the
resources are appropriately allocated and used accordingly with
appropriate feedback from actual performance.
 And, based on actual result (feedback) of executed budget, managers are
equipped with relevant information to make informed decisions.
Purposes of Budget
Budget serves as the comprehensive financial plan for an
organization as a whole and gives an organization several
benefits;
●
●
●
●
●
●
Set targets/goals and achieving desired short-term and longterm goals
Identify funding strategies
Communicates priorities
Control Spending – eliminate unnecessary costs
Improves communication and coordination of strategies.
Provide a profit margin
Budget vs. Planning & Control
Budgeting plays a crucial role in planning and control.
Budget as a tool for Planning;
 In planning, businesses identify objectives and the actions
needed to achieve them.
 Budgets are the quantitative expressions of these plans, stated
in either physical or financial terms or both.
 When used for planning, a budget is a method for translating
the goals and strategies of an organization into operational
terms.
Budget vs. Planning & Control
Budgeting plays a crucial role in planning and control.
Budget as a tool for Controlling;
 Control is the process of setting standards, receiving feedback
on actual performance, and taking corrective action whenever
actual performance deviates significantly from planned
performance.
 Thus, budgets can be used to compare actual outcomes with
planned outcomes, and they can steer operations back on
course, if necessary.
Budget vs. Planning & Control
Budgeting plays a crucial role in planning and control.
Budget as a tool for Decision making;
Developing a Budget
1. Budgets are prepared for
a) Departments.
b) Divisions/Branches
c) Company as a whole.
2. The Budget Committee is responsible for
approval of the budget:
a)
b)
c)
d)
Senior managers, e.g.. sales manager
President
CFO
Board of directors
Administration of the Budget
1. Basic mechanism
The implementation of the budget involves two main operations:
Commitments and Payments. Commitment of expenditure, a decision is taken to
use a particular sum from a specific budgetary line in order to finance a specific
activity.
2. Methods of implementation*
The accountant(s) working with the budgeting committee, may implement the budget in
one of the following ways:
a) Directly by its departments (within the finance department),
b) Jointly with other departments’ managers (shared management);
c) Indirectly by entrusting budget implementation tasks to other employees and
supervise them thoroughly.
Types of Budgets
The main types of budgets are;
1. Master Budget
It’s a comprehensive financial plan for the year made up of various
individual departmental and activity budgets. A master budget can be
divided into operating and financial budgets.
2. Operating Budget
This concerned with the income generating activities of a firm: sales
budget, production budget, and finished goods inventories budget.
3. Financial Budget
This concerned with the inflows and outflows of cash and financial
position. Planned cash inflows and outflows are detailed in a cash
budget, and expected financial position at the end of the budget period
is shown in a budgeted, or pro forma, balance sheet.
Static Budgets vs. Flexible Budgets
Types of budget based on cost behaviour
1. Static Budgets
 A static budget remains the same even if there are significant changes
from the budgets made during planning and operation. The forecasted
amounts remain unchanged regardless of changes in activities.
 Static budgets can be used on those department within a business that
does not correlate to sales and production.
2. Flexible Budgets
 A flexible budget is one that changes with fluctuations in sales,
production volume or business activities
 Flexible budgeting is used in planning by showing what costs will be at
various levels of activity. It provides expected costs for a range of
activities.
 Flexible budgets involves changing activities; sales, production.
Types of budget based on business activities
The Operating Budgets
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Sales budget
Production budget
Direct materials purchases budget
Material usage budget
Direct labor budget
Overhead budget
Marketing expense budget
Research and development budget
Administrative expense budget
Budgeted income statement
The Financial Budgets
The usual financial budgets prepared are:
1.
2.
3.
4.
The budgeted balance sheet
The budgeted statement of cash flows
The budget for capital expenditures
Budgeted income statement
Budgets to Discuss
The following Budgets will be discussed in exercises;
1. Sales Budget – cash sales and credit sales
1. Production Budget
a) Direct Material
b) Direct Labour
c) Overhead
2. Cash flow Budget
a) Cash collections
b) Cash disbursements
c) Financing
Summary
A budget is a forecast of revenue and expenses over a specified
period for a profit making business. Budgets are an important part
of running a business efficiently.
Most companies will start with a master budget, which is a
projection for the overall company. Master budgets typically
forecast the entire fiscal year.
A static budget is a budget with numbers based on planned
outputs and inputs for each of the firm's divisions.
Flexible budgets contain the actual results and are compared to
the company's static budget to identify any variances.
The operating budget is a statement indicating all the operational
expenses and incomes of the organization. It simply deals with
items from income and expense statement. The financial budget
is the plan which includes the cash inflow and outflow of the firm.
Variance is resulted of budgets and actual performance.
Bibliography
 Balakrishnan, R., Sprinkle, G. B., & Sivaramakrishnan, K. (2010). Managerial Accounting
(1st ed.). New Delhi, India: John Wiley & Sons, Inc.
 Charles, T. H., Monte, W., William, M., Rebecca, T., Srikant, M. D., George, F., . . .
Christopher, I. (2011). Cost Accounting - A Managerial Emphasis (1st ed.). (K. Hutchings, S.
Goodhall, M. Stone, K. Pittard, R. Deighton, C. Pike, . . . J. Rudd, Eds.) Frenchs Forest,
Sydney, Australia: Pearson.
 Garg, A. K. (2012). Production and Operations Management. (K. Bellani, V. Mahajan, & K.
K. Jha, Eds.) New Delhi, India: McGraw Hill Education.
 Khan, M. Y., & Jain, P. K. (2013). Management Accounting; Text, Problems and Cases (6th
ed.). (K. Bellani, V. Mahajan, T. K. Maji, S. Khare, & S. Negi, Eds.) New Delhi, India: McGraw
Hill Education (India) PTY LTD.
17
End of Lecture – Budgeting