by sachin sharma manipal jaipur

1. Budgeting & Budgetary Control

2. BUDGETING
Sales
projections
Business
trends
Inventory
needs
New
competition

3. Budget
• A formalized plan describing the use and
source of financial and operating resources
over a given time period.
• CIMA defines Budget as – A plan quantified in
monetary terms, prepared and approved prior
to a defined period of time, usually showing
planned income to be generated and
expenditure to be incurred during that period.

4. Budget, Budgeting &
Budgetary Control
• A budget is a formal quantitative expression of
the objectives/goals of management.
• The act of preparing a budget is called
budgeting
• The use of a budget to assist the management
in the controlling process is called budgetary
control.

5. Forecast Vs. Budget
Forecast Budget
Forecasts is mainly concerned with
anticipated or probable events
Budget is related to planned events
Forecasts may cover for longer period
or years
Budget is planned or prepared for a
shorter period
Forecast is only a tentative estimate Budget is a target fixed for a period.
Forecast results in planning Result of planning is budgeting
The function of forecast ends with the
forecast of likely events
The process of budget starts where
forecast ends and converts it into a
budget
Forecast usually covers a specific
business function
Budget is prepared for the business as a
whole
Forecasting does not act as a tool of
controlling measurement.
Purpose of budget is not merely a
planning device but also a controlling
tool.

6. Purpose of Budgeting
• Forces management planning
• Motivation
• Evaluation and control
• Communication
• Coordination
• Education

7. 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

8. Strategic
Plan
Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback
Corrective
Action
Investigation
Comparison of
Actual &
Planned
Monitoring of
Actual
Activity
Long-Term
Objectives
Budgeting Process

9. Types of Budget
• Sales
• Production
• Purchases (Direct materials)
• Labor
• Manufacturing overhead
• Administrative
• Cash
MASTER BUDGET is a collection of various types
of Budget

10. Operating Budgets
• Sales plan
• Production plan
• Materials purchasing plan
• Labor hiring and training plan
• Capital spending plan
• Administrative and discretionary spending
plan

11. Budget Types
Sales Budget
The sales budget represents
the expected quantity
of each type of
product/service
to be sold multiplied by
its expected selling price.
Purchase Budget
The purchase budget
represents
the expected quantity
of each type of product/service
to be bought multiplied by
its expected purchasing price.

12. Generic Budget Format
Amount needed for current requirements
+ Amount desired for future needs
= Total needs
- What is already on hand
= Amount to be acquired

13. Production Budget
Predicted sales quantity
+ Desired ending inventory
Total needed units
- Amount already on hand (beginning inventory)
Units to be produced

14. Direct Material (Purchasing Budget)
• 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

15. Capital Budgeting &
Financial Budgeting
• Purpose is to plan for the acquisition of land,
buildings, and capital equipment for
expansion and/or replacement.
Master Budget usually presented in three forms:
 A statement of expected cash flows
 The projected balance sheet
 The projected income statement

16. Flexible & 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

17. 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?

18. Case-1
Nesley Ltd. has prepared the following sales budget for the first five months
of 2015
Month Sales Budget (in units)
January 10,800
February 15,600
March 12,200
April 10,400
May 9,800
Inventory of finished goods at the end of every month is to be equal to 25% of sales
estimate for the next month. On 1st January, 2015 there were 2,700 units of product on
hand. There is no work in progress at the end of any month.
Every unit of product requires two types of material in the following quantities:
Material A: 4 kg. and Material B: 5 kg.
Materials equal to one-half of the requirements of next month’s production are to be in
hand at the end of every month. This requirement was met on 1st Jan 2015. Budgeted
stock in hand is one-half of the budgeted production in each month.
Prepare the following budgets for the quarter ending 31st March 2015:
a) Production Budget (b) Purchase Budget

19. Solution
Production Budget (in units) for quarter ending 31st March 2015;
January February March April
Budgeted sales 10,800 15,600 12,200 10,400
Add: Budgeted closing of
finished goods (use 25% of
next month’s sales)
3,900 3,050 2,600 2,450
Less: Budgeted opening stock
of finished goods
2,700 3,900 3,050 2,600
Budgeted Production 12,000 14,750 11,750 10,200

20. Solution
January February March
A B A B A B
Requirement for
budgeted production
@ 4kg for A & 5 kg for B
48,000 60,000 59,000 73,750 47,000 58,750
Add: Budgeted closing
stock (half of next
month’s production
29,500 36,875 23,500 29,375 20,500 25,625
Less: Budgeted Opening
stock (1/2 of budgeted
production)
24,000 30000 29,500 36,875 23,500 29,375
Budgeted purchase 53,500 36875 53,000 66,250 44,000 55,000
Purchase Budget (in KG.) for quarter ending 31st March 2015

21. Case-2
Thomas Engineering Co. Ltd. manufactures two articles X and Y. Its sales
department has three divisions: West, South and East. Preliminary sales budgets
for the year ending 31st December 2003, based on the assessments of the
divisional executives:
Product X : West 40,000 units: South 1,00,000 units and East 20,000 units
Product Y : West 60,000 units: South 80,000 units and East Nil
Sales Price X Rs. 2 and Y Rs. 3 in all areas.
Arrangements are made for the extensive advertising of product X and Y and it is
estimated that West division sales will increase by 20,000 units. Arrangements
are also made to advertise and distribute product Y in the Eastern area in the
second half of 2003 when sales are expected to be 1,00,000 units.
Since the estimated sales of the South division represented an unsatisfactory
target, it is agreed to increase both the estimates by 10 %.
Prepare a sales budget for the year ending 31" December 2003.

22. Solution
Division Product X Product Y Total
Qty Price Amt Qty Price Amt
West 60,000
(40,000 +
20000 ↑)
2 120,000 80,000
(60,000 +
20000 ↑)
3 240,000 360,000
South 110,000
(1,00,000
+ 10% ↑)
2 220,000 88,000
(80,000+
10% ↑)
3 264,000 484,000
East 20,000 2 40,000 100,000
(↑in 2nd
half)
3 300,000 340,000
Total 190,000 380,000 268,000 804,000 11,84,000
Sales Budget for the year ending 31st Dec 2003

23. Case-3
From the following particulars prepare a production budget of product P and
Q of Nancy sales Corporation for the First Quarter of 2003:
P Q
Sales (in units) :
January
February
March
20,000
15,000
25,000
15,000
20,000
25,000
Selling price per unit Rs. 5 Rs. 10
Targets for 1st Quarter 2003 :
Sales Quantity increase
Sales Price increase
Stock Position Ist Jan. 2003 :
Stock position and Jan. 2003 Sales
Stock Position 31" Mar. 2003 :
Stock Position end Jan. & Feb.
Percentage of subsequent month sales
10%
Nil
50%
10,000
50%
10%
Nil
50%
20,000
50%

24. Solution-3
Production Budget (Units) of Product P and Q for the First Quarter of 2003
Product Particulars January February March
P Expected sales
Add: Closing stock
Less: Opening stock
Budgeted Production
22000
(20,000
+10%↑)
8,250
(50% of
16,500)
11,000
(50% of exp.
Sales)
19,250
16,500
(15,000
+10%↑)
13,750
(50% of
27,500)
8,250
(50% of exp.
Sales)
22,000
27,500
(25,000
+10%↑)
10,000
(given in
question)
13,750
23,750
Q Expected sales
Add: Closing stock
Less: Opening stock
Budgeted Production
16,500
(15,000
+10%↑)
11,000
(50% of
16,500)
8,2500
(50% of exp.
Sales)
19,250
22,000
(20,000
+10%↑)
13,750
(50% of
27,500)
11,000
(50% of exp.
Sales)
34,750
27,500
(25,000
+10%↑)
20,000
(given in
question)
13,750
33,750