budget and budgeting

1. Budgeting - 1
BUDGETING
Sales
projections
Business
trends
Inventory
needs
New
competition
?
? ?
?

2. Budgeting - 2
What is a budget?
A formalized plan describing the
use and source of financial and
operating resources over a given
time period

3. Budgeting - 3
PURPOSES OF
BUDGETING
• Forces management planning
• Motivation
• Evaluation and control
• Communication
• Coordination
• Education

4. 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

5. Budgeting - 5
The
Budgeting
Process

6. Budgeting - 6
Strategic
Plan
Short-Term
Objectives
Short-Term
Plan
Budgets
Feedback
Corrective
Action
Investigation
Comparison of
Actual &
Planned
Monitoring of
Actual
Activity
Long-Term
Objectives

7. Budgeting - 7
The MASTER BUDGET is a
collection of various types of
budgets
 Sales
 Production
 Purchases (Direct materials)
 Labor
 Manufacturing overhead
 Administrative
 Cash

8. Budgeting - 8
Master
Budget
Outputs

9. Budgeting - 9
OPERATING BUDGETS
 Sales plan
 Production plan
 Materials purchasing plan
 Labor hiring and training plan
 Capital spending plan
 Administrative and discretionary
spending plan

10. 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.

11. 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

12. Budgeting - 12
Production
 Predicted sales quantity
 + Desired ending inventory
 Total needed units
 - Amount already on hand (beginning
inventory)
 Units to be produced
Note the sales
budget figure will
be the starting
point for
this budget.

13. 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

14. Budgeting - 14
CAPITAL BUDGET
 Purpose is to plan for the
acquisition of land, buildings, and
capital equipment for expansion
and/or replacement.

15. 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

16. 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

17. 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

18. Budgeting - 18
Behavioral
Aspects of
Budgeting

19. 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?

20. Budgeting - 20
Top management wants our
budget figures for the month.
What should we tell them?