BUDGETING

Budgeting is the various activities within a company which is coordinated by the preparation of plans (referred as budget) of actions for future periods.

budget is a written financial plan of a business for a specific period oftime, expressed in money value.

Planning the annual operations Coordinating the activities of various

parts of the organization and ensuring that part are harmony with each other

Communicating plans to the various responsibility centre managers

Motivating managers to the strive to achieve the organizational goals

Controlling activities Evaluating the performance of

managers

© 2000 Colin Drury

Why do we produce budgets?

1. To aid the planning of actual operations:

• by forcing managers to consider how conditions might change and what steps should be taken now.

• by encouraging managers to consider problems before they arise.

2. To co-ordinate the activities of the organization:

• by compelling managers to examine relationships between their own operation and those of other departments.

© 2000 Colin Drury

Why do we produce budgets?

3. To communicate plans to various responsibility centre managers:

• everyone in the organization should have a clear understanding of the part they are expected to play in achieving the annual budget.

• by ensuring appropriate individuals are made accountable for implementing the budget.

4. To motivate managers to strive to achieve the budget goals:

• by focusing on participation

• by providing a challenge/target.

© 2000 Colin Drury

5. To control activities:

• by comparison of actual with budget (attention directing/management by exception).

6. To evaluate the performance of managers:

• by providing a means of informing managers of how well they are performing in meeting targets they

have previously set.

Communicating details of the budget policy

Determining the factor that restricts performance

Preparation of sales budget Initial preparation of budgets Negotiation of budgets Coordination and review of budgets Final acceptance of the budgets Budget review

Decisions affecting the budget year will have been taken previously

Long-range plan is starting point for preparation of the annual budget

Policy effect may include planned changed n sales mix,expansion or contraction certain activities

Manager should aware the top management policy for implementing the long-term plan in the current year’s budget

Sales demand is the main factor that restrict the performance

It is possible for the production capacity to rstrict performance when sales demand is in excess of available capacity

This factor tdetermine the point at which the annual budgeting process should begin

Volume of sales and te sales mix determine the level in a company’s operation

This is the difficult plan to produce because total sales revenue is depends on the action of the customer

Sales demand may influenced by the state of the economy or the actions of the competitors

Preparation of bufget should be a ‘bottom-up’ process

It enables the manager to participate in the preparation budgets and increases the probability that they will accept the budget and achieve the budget targets

Past data may used as starting point for producing budget

Changed in the future condition must be taken into account

Past data information may provide guidance for future.

© 2000 Colin Drury

Fig 15.2 An illustration of budgets moving up the organizational hierarchy.

© 2000 Colin Drury

Fig 15.1 An overview of the planning process

a set of numerical data that is obtained at regular periods over time

it also can defined as a set of data for certain variable that can describe the upward n downward movement of the variable over regular periods of time

the regular periods of times: yearly quarterly monthly seasonally weekly daily

FUNCTIONAL BUDGETS CASH BUDGETS MASTER BUDGETS

SALES BUDGET PRODUCTION BUDGET AND BUDGETED

STOCK LEVELS DIRECT MATERIALS USAGE BUDGET DIRECT MATERIALS PURCHASE

BUDGETS DIRECT LABOUR BUDGET FACTORY OVERHEAD BUDGET SELLING AND ADMINISTRATION BUDGET DEPARTMENTAL BUDGET

-ENSURE THAT SUFFICIENT CASH IS AVAILABLE AT ALL TIMES TO MEET THE

LEVEL OF OPERATIONS THAT ARE OUTLINED IN THE VARIOUS BUDGETS.

-CAN BE PREPARE QUARTERLY,WEEKLY OR MONTHLY

-HELP FIRMS TO AVOID CASH BALANCES THAT ARE SURPLUS TO ITS

REQUIREMENTS BY ENABLING MANAGEMENTS TO TAKE STEPS IN ADVANCE TO INVEST THE SURPLUS CASH IN SHORT-TERM INVESTMENT.

  Month 1 Month 2 Month 3

$ $ $

Cash receipts

Receipts from debtors

Sales of capital items

Loans received

Proceeds from share issues

Any other cash receipts

Cash payments

Payments to creditors

Wages and salaries

Loan repayments

Capital expenditure

Taxation

Dividends

Any other cash expenditure

Receipts less payments

Opening cash balance b/f W X Y

Closing cash balance c/f X Y Z

Step 1: set out a pro forma cash budget month by month. Below is a suggested layout.

ii) Step 2: sort out cash receipts from debtors

iii) Step 3: other income iv) Step 4: sort out cash payments to

suppliers v) Step 5: establish other cash

payments in the month

BUDGETED PROFIT AND LOSS BUDGETED BALANCE SHEET

INCREMENTAL BUDGETING ZERO-BASED BUDGETING ROLLING BUDGET ACTIVITY-BASED BUDGET

STEPS:1. DETERMINE THE OBJECTIVES OPERATIONS

AND COST OF ALL ACTIVITIES UNDER THE MANAGER’S JURISDICTION

2. EXPLORE ALTERNATIVE MEANS OF CONDUCTING EACH ACTIVITY

3. EVALUATE ALTERNATIVE BUDGET AMOUNTS FOR THE VARIOUS LEVELS OF EFFORTS FROM EACH ACTIVITY

4. ESTABLISH MEASURES OF WORKLOAD AND PERFORMANCE

5. RANK ALL ACTIVITIES IN OTHER OF THEIR IMPORTANCE TO THE ORGANIZATIONS

ADVANTAGES DISADVANTAGES

-TO IDENTIFY AND REMOVE INEFFICIENT OR OBSELETE OPERATIONS

-HIGH VOLUME OF PAPERWORK

-ALL FUNCTIONS ARE REVIEWED AND REEVALUATED ANNUALLY FROM ZERO-BASE

-CALL FOR MANAGEMENT SKILLS IN DECISION MAKING

-IMPOSES DISCIPLINES IN ORGANIZATIONS

-EMPHASIZE ON SHORT-TERM BENEFITS

-IMPROVE THE QUALITY OF MANAGEMENT DECISIONS

-MAY PRODUCE MORE UNCERTAINTY AND CONFLICTS

© 2000 Colin Drury

• Conventional budgeting is inappropriate for those activities where the consumption of resources does not vary proportionately with the volume of the final output of products or services.

• For support activities conventional incremental budgets merely serve as authorization levels for certain levels of spending.

• Incremental budgeting results in the cost of non-unit level activities becoming fixed.

• ABB aims to authorize only the supply of those resources that are needed to perform activities required to meet budgeted production and sales volumes.

© 2000 Colin Drury

• The ABB process is the reverse of the ABC process:

Budgeted output of cost objects

Determine the necessary activities

Determine the resources required for the budget period