Budgeting - 1
BUDGETING
Sales
projections
Business
trends
Inventory
needs
New
competition
Budgeting - 2
What is a budget?
A formalized plan describing the
use and source of financial and
operating resources over a given
time period
Budgeting - 3
PURPOSES OF BUDGETING
•
•
•
•
•
•
Forces management planning
Motivation
Evaluation and control
Communication
Coordination
Education
Budgeting - 4
FEATURES OF A SOUND
BUDGETARY SYSTEM







Participative budgeting
Frequent feedback on performance
Realistic standards
Controllability
Flexible budgeting
Multiple measures of performance
Monetary and nonmonetary incentives
Budgeting - 5
The
Budgeting
Process
Budgeting - 6
Strategic
Plan
Long-Term
Objectives
Monitoring of
Actual
Activity
Short-Term
Objectives
Short-Term
Plan
Comparison of
Actual &
Planned
Budgets
Investigation
Feedback
Corrective
Action
Budgeting - 7
The MASTER BUDGET is a
collection of various types of
budgets







Sales
Production
Purchases (Direct materials)
Labor
Manufacturing overhead
Administrative
Cash
Budgeting - 8
Master
Budget
Outputs
Budgeting - 9
OPERATING BUDGETS






Sales plan
Production plan
Materials purchasing plan
Labor hiring and training plan
Capital spending plan
Administrative and discretionary
spending plan
Budgeting - 10
Sales Budget
The sales budget represents
the expected quantity
of each type of product/service
to be sold multiplied by
its expected selling price.
Budgeting - 11
Generic budget format





Amount needed for current
requirements
+ Amount desired for future needs
= Total needs
- What is already on hand
= Amount to be acquired
Budgeting - 12
Production
Note the sales
budget figure will
be the starting
point for
this budget.
 Predicted sales quantity
 + Desired ending inventory
 Total needed units
 - Amount already on hand (beginning
inventory)
 Units to be produced
Budgeting - 13
Direct Materials (Purchasing)

This budget is for planning the acquisition of
raw materials to support the organization’s
production needs identified in the production
budget.

Units to be produced
x Raw material required per unit produced
Total raw material needed for production
+ Desired ending inventory
= Total raw material needed
- Inventory on hand
= Raw materials to be acquired






Budgeting - 14
CAPITAL BUDGET

Purpose is to plan for the
acquisition of land, buildings, and
capital equipment for expansion
and/or replacement.
Budgeting - 15
FINANCIAL BUDGETS
Master Budget usually presented in
three forms:
 A statement of expected cash flows
 The projected balance sheet
 The projected income statement
Budgeting - 16
FLEXIBLE vs. STATIC BUDGETS
 Flexible budgets - those that vary with
the activity level in the firm
 Static budgets - those that do not
change with changes in activity levels
The use of the budget data
determines which type of
budget is most appropriate
Budgeting - 17
BUDGETING APPROACHES
 Incremental budgeting
– A budgeting approach that assumes the starting
point for each budget item is the amount spent on it
in the previous budget
– The new budget is seen as last year’s +/- a specified
increment
– Less costly but may not be strategically sound
 Zero-based budgeting
– A budgeting approach that assumes the starting
point for each budget item is zero
– Essential feature is a review of the necessity of each
expenditure element/activity as part of the
budgeting process
– More costly but more strategically sound
Budgeting - 18
Behavioral
Aspects of
Budgeting
Budgeting - 19
DESIGNING THE BUDGET PROCESS



How should budgets be
determined?
Who should be involved in the
budgeting process?
At what level of difficulty should the
budget be set to have the greatest
positive influence on people’s
motivation and performance?
Budgeting - 20
Top management wants our
budget figures for the month.
What should we tell them?