Budgeting

MEANING
•A budget is a financial or quantitative plan of
operation for a forthcoming accounting
period. It is set within the framework of an
organization’s strategic plans.
•Budgeting in a business sense is the planned

allocation of available funds to each

department within a company.
Purpose of Budgeting
Coordination

Communication of Targets

Establish a System of Control

Compel Planning
Steps in Preparation of a Budget
 Budget Committee
 Budget Manual
 Identifying the Principal Budget Factor
Stages Involved in Preparation of Budget

 Preparation of Sales Budget

 Preparation of Production Budget
 Preparation of Material Usage Budget, Machine
Usage Budget, a labour budget
 Preparation of Material Stock Budget
 Drafting the Budgets for each Department
 Preparing Budgeted Profit and Loss Account and
Balance- Sheet
Features of Budgeting
 Communication
 Motivation
 Control
 Evaluation
 Self-education
Advantages of Budgeting
 Formalization of Planning
 Expectations: Framework for Judging
Performance
 Communication and Coordination
Disadvantages of Budgeting
 Difficult to estimate some expenses
 Reduces the Flexibility
 Limitation of longer budget period
 Requirement of changes
Components of Master Budget

●
Sales Budget
A. Operating ●

●
Purchases Budget
Cost- of- goods- sold Budget
Budget ●

●
Operating expenses Budget
Budgeted income statement

●
Capital Budget
B. Financial ●
Cash Budget
Budget ●
Budgeted Balance- Sheet
Flexible Budget
 A flexible budget is a budget that adjusts for
changes in sales volume and other cost driver
activities. The flexible is prepared by managers for
any level of activity. For performance evaluation,
the flexible budget would be prepared at the actual
levels of activity achieved.
Illustration 1:The expenses budgeted for production
of 10,000 units in a factory is furnished below.
Prepare flexible budget for 8000 units and 6000
units:
 illustration 1.docx
Illustration 2:
illus 2.docx