Subject: Management Accounting and Decision Making

Submitted To: Mr.Ammar Ud Din

Submitted By: Umar Sarfraz Khan

Roll no.E19MBA-125

Section: B

Semester: First

Assignment: 1

Submission Date: 15-April-2020

Q1) Differentiate between budget and a forecast
Budgeting refers to the process of projecting the revenues and costs of the company for the future
specific period of time that business wants to achieve, whereas, forecasting refers to the estimate of
what actually will be achieved by the company
Criteria/Item Budgeting
Purpose Budgets are formulated for
setting a target for the coming
month or a quarter or a year.
Content It contains absolute values that
the company aims to achieve
therefore it may contain the
number of units it has to sell or
the amount of revenue it has to
generate
Methodology It observes the past trends and
tries to set a realistic target based
on these after smoothening for
one-off or extraordinary incident
Frequency A budget is formulated once per
time period, for example, if we
have budgeted the revenues and
expenditures for the upcoming
year, it will remain so till the year
is not completed
Variance Analysis Once the budgeted time frame
get over, the actual results are
compared to the budgeted goals
to see how they have varied and
whether the budget was
realistically achievable or not so
the future budgets are revised
accordingly
Areas covered Budgeting is a broader analysis
and it includes a larger number of
items such as revenues, costs,
cask flows, profits, items of
financial position
Structural As a budget is a long term
changes phenomenon, variances are
looked at through a stricter lens.
It may lead to structural changes
Forecasting
It is performed to understand whether the
budgeted target will be timely met or not
As the forecast expresses expectations, it does
it better through percentages, implying what
proportion of budgeted values has been
accomplished and how much of it can be
reasonably accomplished in the residual time
It analyses the changes in the current
circumstances and tries to draw a conclusion
that in the light of such circumstances,
whether the budget will be met or not
Forecasting is done on a more frequent basis,
and at times may even be done on a real-time
or a constant basis so that appropriate
measures can be timely undertaken in an
attempt to meet the budgetary requirements
No such analysis is conducted for the
forecasted numbers as they are only interim
numbers, in fact, forecasting in itself is a
variance analysis technique
Forecasting is a narrower analysis as it deals
with only revenues and expenses and not with
cash flows or financial position.
Forecasting is a short term measure and
therefore it doesn’t lead to drastic changes. It
may allow the management to take decisions
as to increasing the shifts of workers as per
change in demand however it won’t lead to
changes such as increasing plant capacity.
Awareness level Budgetary goals and objectives
are conveyed to all levels
including the shop floor levels in
manufacturing companies so that
the targeted production is
achieved.
Forecasted numbers are mostly for the
management and the team of supervisors so
that they are aware of how to manage the
work to meet the targets.

Q2) what is budget and how it is related to control function?

a) Budget:

a formal statement of the financial resources set aside for carrying out specific activities in
a given period of time.

It helps to co-ordinate the activities of the organization.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

A control technique whereby actual results are compared with budgets.

Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.

Budgetary control and responsibility centres

These enable managers to monitor organizational functions.

A responsibility centre can be defined as any functional unit headed by a manager who is
responsible for the activities of that unit.

There are four types of responsibility centres:

a) Revenue centre

Organisational units in which outputs are measured in monetary terms but are not directly
compared to input costs.

b) Expense centre

Units where inputs are measured in monetary terms but outputs are not.

c) Profit centre
Where performance is measured by the difference between revenues (outputs) and
expenditure (inputs). Inter-departmental sales are often made using "transfer prices".

d) Investment centre

Where outputs are compared with the assets employed in producing them, i.e. ROI.

Q3) Define Sales budget, Production budget, Labor budget, Material

purchase budget and FOH budget.

Sales budget
A sales budget estimates the sales in units as well as the estimated earnings from these
sales. Budgeting is important for any business. Without a budget companies can’t track
process or improve performance. The first step in creating a master company while budget
is to create a sales budget.

Production budget
A production budget is a financial plan that lists the number of units to be manufactured
during a period. In other words, this is a report that estimates the number of units that a
plant will produce from period to period.

Labor budget
A type of budget created by a business, company or organization for the complete number
of employees that are employed in labor created, accounted, recorded and apportioned
accurately. Every business, company or organization that employs people has a
monthly labor budget.

Material purchase budget

The materials budget (or materials purchases budget) is used to plan how much
raw materials we need to have available to meet budgeted production. This is typically
determined as a percent of next quarter's material needs. In a materials budget, we will deal
with units first and then add the budgeted cost near the end.

Factory Overhead Budget

The factory overhead budget shows all the planned manufacturing costs which are needed
to produce the budgeted production level of a period, other than direct costs which are
already covered under direct material budget and direct labor budget. The overhead budget
is an operational budget contained in the master budget of a business. It has two sections,
one for variable overhead costs and other for fixed overhead costs.