MODULE 1
BUDGETARY PLANNING AND CONTROL
OUTLINES
• Budgetary planning and control.
• Incremental , Zero-based and Activity-based
approaches to budget formulation.
• Functional budgets.
• Behavioural aspects of budgeting.
Budgetary Planning and Control
Definition of Budget: A budget is a quantitative statement for a defined
time which may include planned revenues, expenses, assets, liabilities
and cash flow. A budget provides a focus for the organization and it aids
the coordination of activities and facilitates control. It is a financial
and/or quantitative plan of operations for a forthcoming accounting
period.
Budgetary control is the establishment of budgets relating the
responsibilities of executive 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.
Objectives of Budgetary control
These are to:
a) Combine the ideas of all levels of management in the preparation of
the budget;
b) Co-ordinate all activities of the business;
Budgetary Planning and Control … cont.
c) Centralise control;
d) Decentralise responsibility of each of the managers involved;
e) Act as a guide for management decisions, when unforeseeable
conditions
affect the budget;
f) Plan and control income and expenditure so that maximum profitability is
achieved;
g) Direct capital expenditure in the most profitable way; etc. etc.
Stages in the planning process
1) Establishing objectives – the objectives include the Mission, Corporate
objectives and Unit objectives of an organization.
2) Identify potential strategies – this is the possible courses of actions that might
enable the organization achieve its objectives.
3) Evaluation of strategic options.
4) Selection of alternative courses of action
5) Implementation of the long-term plans
6) Monitoring of actual outcomes/results
7) Respond to divergences from planned outcomes
Budgetary Planning and Control … cont.
The purpose of a budget
1) Planning annual operations
2) Coordinating the activities of the various parts (departments) of the organization and
ensure harmony.
3) Communicating plans to the various responsibility centre managers
4) Motivating managers to strive to achieve the organizational goals
5) Controlling activities
6) Evaluating the performance of managers
Stages in the budgeting process
1) Communicating details of budget policy and guide lines to those people responsible for
the preparation of budgets.
2) Determining the factor that restricts outputs
3) Preparation of the sales budget.
4) Initial preparation of various budgets.
5) Negotiation of budgets with superiors.
6) Co-ordination and review of budgets.
7) Final acceptance of budget.
8) Ongoing review of budgets.
Budgetary Planning and Control … cont.
Types of Budget
1. Functional basis of Budget
a)
b)
c)
d)
e)
f)
g)
h)
Sales budget
Production budget
Material budget
Labour budget
Manufacturing overhead budget
Administration expenses budget
Selling and Distribution budgets
Cash budget
2. On the basis of flexibility
a) Fixed budget
b) Flexible budget (variable budget)
3. On the basis of period
a) Long time budgets
b) Short time budget
Budgetary Planning and Control … cont.
SALES BUDGET
Sales budget is the first and basic component of master budget and it shows the expected number of sales
units of a period and the expected price per unit. It is prepared by multiplying the budgeted sales in units
by the selling price.
Sales Budget influences many of the other components of master budget either directly or indirectly. This
is due to the reason that the total sales figure provided by sales budget is used as a base figure in other
component budgets. For example the schedule of receipts from customers, the production budget, pro
forma income statement, etc.
Due to the fact that many components of master budget rely on sales budget, the estimated sales volume
and price must be forecasted with sufficient care and only reliable forecast techniques should be
employed. Otherwise the master budget will be rendered ineffective for planning and control.
PRODUCTION BUDGET
Production budget is a schedule showing planned production in units which must be made by a
manufacturer during a specific period to meet the expected demand for sales and the planned finished
goods inventory. The required production is determined by subtracting the beginning finished goods
inventory from the sum of expected sales and planned ending inventory of the period. Thus:
Planned Production in Units = Expected Sales in Units + Planned Ending Inventory in Units − Beginning
Inventory in Units
Production budget is prepared after sales budget since it needs the expected sales units figure which is
provided by the sales budget. It is important to note that only a manufacturing business needs to prepare
the production budget.
Budgetary Planning and Control … cont.
CASH BUDGET
Cash budget is a financial budget prepared to calculate the budgeted cash inflows and
outflows during a period and the budgeted cash balance at the end of the period. It is a
summary of the company’s expected cash inflows and outflows over a given period of time.
Cash budget helps the managers to determine any excessive idle cash or cash shortage that
is expected during the period. Such information helps the managers to plan accordingly.
FLEXIBLE BUDGET
This technique of budgeting is also known as variable budgeting. According to CIMA, it is a
budget that is designed to change in accordance with the level of activity attained. It is a
budget that can be tailored to any volume level. A flexible budget recognizes fixed, variable
and semi-variable cost and it is designed to change in relation to the actual volume or
output or activity level in a period.
MASTER BUDGET
The master budget consolidates the position of all the functional budgets in the form of a
budgeted trading and profit and loss account and a budgeted balance sheet.
Budgetary control relates expenditure to the person responsible for each function, thus
affording an effective methods of control. It is an important principle of the system that an
executive is held responsible only for expenditure within his control.
Incremental , Zero-based and Activity-based
Approaches to Budget formulation
Incremental Budget
An incremental budget is a budget prepared using a previous period’s budget or actual performance as a
basis with incremental amounts added for the new budget period.
With incremental budgeting, the allocation is based upon allocations from the previous period. This
approach is not recommended as it fails to take into account changing circumstances. Moreover, it
encourages “spending up to the budget” to ensure a reasonable allocation in the next period. It leads to a
“spend it or lose it” mentality.
Zero-based Budget (ZBB)
Also known as priority-based budgeting emerged in the late 1960s as an attempt to overcome the
limitations of incremental budgets. This approach requires that all activities are justified and prioritized
before decisions are taken relating to the amount of resources allocated to each activity.
ZBB works from the premise that projected expenditure for existing programmes should start from base
zero, with each year’s budgets being compiled as if the programmes were being launched for the first
time. The budgetees should present their requirements for appropriations in such a fashion that all funds
can be allocated on the basis of cost-benefit analysis.
Activity-based Budget
This is a budgeting technique that is based on an activity framework and utilizing the cost driver data in
the budget setting and variance feedback processes. It is part of planning and controlling system that
tends to support the objectives of continuous improvement. It is a form of development of conventional
budgeting system. It encourages immediate and relevant performance measures required than are found
in conventional budgeting system.
Functional Budgets
A functional budget is one, which relate to a function of
the business. All the functional budgets are
summarized into what is known as a “master budget” .
there functional budgets are subsidiary bright of the
master budget. Functional budgets include
• Sales budget
• Production budget
• Purchase of materials
• Production cost budget
• Plant utilization budget
• Capital expenditure budget
• Selling and distribution cost budget
• Cash budget, etc. etc.
Functional Budgets …cont.
Explanation will be given on few of these as much has been explained in the previous slides.
Production cost budget
This is the quantity of product to be manufactured expressed in terms of cost. The following
budgets are summarized to give the production cost budget
Labour budget
Raw materials
Production overheads budget
a)
Labour Budget: It specifies the direct labour requirement of various products as
envisage in the production budget. It represents the forecast of labour requirement to
meet the demands of the company during the budget period. The direct labour budget will
be developed for both direct labour hours and direct labour cost. After the labour
requirement relating to different grades are finalized, estimated rate per hour and labour
cost per unit is arrived it.
b)
Raw materials budget: The budget shows the estimated quantities of all the raw
materials and components needed for the output demanded by the production. The
materials budget provides basis for of control over materials usage and purchase cost
budget. The following formula can be used
Purchase = Closing stock + Usage – Opening Stock
The raw materials budget serves the following purposes
i. It assist the purchasing department in planning the purchasers
ii. It helps in the preparation of purchase budget
iii. It provides data for raw materials control
NB = Indirect materials are included in the overhead cost budget .
Behavioural aspects of Budgeting
1. Motivation: This is the need, some selected goal
and the resulting drive that influence action
towards the goal”. Motivation has two aspects:
 Direction or goal congruence
 Strength with getting subordinates to run rather than work
towards the desired goal.
2. Participation: Participation by employees in budget setting
and the encouragement of a human approach and manmanagement would remove the drawbacks to effective
budgeting. All the operators of the budget should be fully
involved in the preparation of the budget. Participation leads
to more positive attitude and higher performance.
3. Goal Congruence: This means alignment of individual
interest of managers to the overall objective of an
organization.
Behavioural aspects of Budgeting… cont.
4. Management support: Top management should be
interested in the budgetary system in order to ensure that
operating managers give the necessary co-operation.
5. Reporting System: Efforts should be made to isolate
uncontrollable cost from controllable ones in order to have
meaningful variances reporting system.
6. Communicating: Communication should be adequate
with the operating managers at all stages of the budgetary
system.
Review Questions
1) The following information has been made available from the records of Oluwatobi Nig. Ltd
for the six months of 2006 (and of only the sales of January 2007) in respect of production X
(a) The unit to be sold in different months are
July 2006
1,100
August 2006
1, 100
September 2006
1,700
October 2006
1,900
November 2006
2,300
December 2006
2,300
January 2007
2,000
(b) There will be no work in progress at the end of any month
(c) Finishing units which are equal to half the sales of the next month will be in stock at the
end of every month (including June, 2006
(d) Budgeting production and production cost for the year ending 31st 2006, are as follows:
Production (Unit)
22,100
Direct materials per unit
N 10
Direct wages per unit
N4
Total factory overhead apportioned to production N 88,000 you are required to prepare:
a) A production budget for each or the six months of 2000 and
b) A summarized production cost budget for the same period
Review Questions …cont.
2) The sales manager of Igbala Nig. Ltd reports that next year
he expects to sell 100,000 units of a certain production. The
production manager consults the sore keeper and cost his
figure as follows:
Two kinds of raw materials A and B are require for
manufacturing the production each unit of the production
requires 2 units of A and 3 units of B.
The estimated opening balance at the commencement of
the next year are – finished production 20,000 units, A –
24,000 and B – 30,000 units the desirable closing balance
at the end of the next year are finished product – next –
28,000 units A – 26,000 units and B – 32,00 units.
Your are required to draw up a quantitative chart to show
the materials purchase budgets for the next year.
3) What is master budget? Highlight the important stages in the
Budgeting Process (Budget Preparation).
References
• Adejola, P. A (2015): Cost & Management
Accounting & Information Technology, Rainbow
Graphics and Publishers, Abuja.
• Colin Drury (2004). Management and Cost
Accounting; 4th Edition, Thompson Learning,
UK