The Use of Budgets in Planning and Decision Making

1. Describe the budget development process, behavioral implications of budgeting, advantages of

budgeting

2. Explain how managers develop a sales forecast and demonstrate the preparation of a sales
budget.

3. Prepare a production budget and recognize how it relates to the material purchases, direct
labor, and manufacturing overhead budgets.

4. Explain the importance of budgeting for cash and prepare summary cash budget.

5. Contrast budgeting in a manufacturing company with budgeting in a merchandising company

and a service company.

6. Differentiate static budgets from flexible budgets.

Meaning

• Budgets are plans dealing with the acquisition and use of resources over a specified time period.

• Budgets can range from relatively simple personal budgets and time budgets to sophisticated
budgets

Budgeting for Planning, Operating, and Control Activities

 manufacturing Master budget

The Operating Cycle

• Budgeting is much more than a number crunching exercise. It is a management task that
requires a great deal of planning and input from a broad range of managers in a company.

• While it is time-consuming, the use of spreadsheets, such as Microsoft Excel, makes the process
much simpler.

Zero-based budgets require managers to build budgets from the ground up each year rather than just
add a percentage increase to last year’s numbers

Although we typically think of budgets as being prepared annually, companies frequently use monthly
budgets and rolling 12-month budgets to provide a mechanism for adjusting items in response to
unforeseen circumstances. As the oldest month rolls off the analysis, the newest month is added.

Participatory budgeting starts with departmental managers and then flows up through middle
management and ultimately to top management. At each level, budget estimates are prepared and
then submitted to the next level of management, which has responsibility for reviewing the budget
and negotiating any changes that need to be made.
Advantages

Budgeting - Behavioral Implications

periods.
expenses across
easier to reach. revenues and
pad it, so targets are budgets may shift
have incentives to to targeted
“meet the budget” compensation tied
Managers who must Managers with

Using last year’s level of sales, sales

forecasts help in the preparation of
Sales forecast production budgets (for manufacturers)
and purchases budgets (for merchandisers).

The sales budget is a key component used

in overall strategic planning and is also used
Sales budget in planning the cash needs of businesses.

Advantages
 Historical data, such as sales trends

General economic trends or factors

Regional and local factors expected to affect sales

Anticipated price changes for purchasing and sales costs

Anticipated marketing or advertising plans

The impact of new products or changes in product mix

Other factors, such as political and legal events

For manufacturing companies, the next step in the budgeting process is to complete the production
budget

Once the sales volume has been projected, companies must forecast how many units of product to
produce in order to meet the sales projections.
Production Budget – Exhibit

1st
January February March Quarter

Budgeted Sales 250,000 325,000 450,000 1,025,000

Desired End Finish Goods* 32,500 45,000 50,000 50,000

Total Budget Production 282,500 370,000 500,000 1,075,000

Begin Finished Goods** 25,000 32,500 45,000 25,000

Required Production 257,500 337,500 455,000 1,050,000

*For March: April sales are projected to be 500,000 units(or 500,000

x 10% = 50,000)
**January beginning inventory given as 25,000.

Cash budgets
Many managers consider managing cash flow to be the single most important consideration
in running a successful business.

Cash budgeting forces managers to focus on cash flow and to plan for the purchase of materials, the
payment of creditors, and the payment of salaries.
They are two:
Cash receipts budget and Cash disbursement budgets
(learn the sources of receipts and deployment of cash (as u have learnt already) and categorise them
under three heads: operating, investing and financing, to enable to prepare Final summary cash
budget

Final Summary Cash Budget from the Cash receipts and disbursements

Static budget VS Fixed budget

The points of distinction discussed under are: time, control, quantity and comparison

This allows comparison

of budgeted amounts to
actual results so causes
can be found for
differences.
Flexible budget
1.Vivek College h as a total of 300 students consisting of 5 sections with 40 students per section. The college plans
for an Industrial tour to a company on a particular day. A private transport operator has come forward to lease out the
buses for the trip. Each bus has the capacity of 50 students, in which two are reserved for faculty and 1 helper and
the helper would be paid Rs.200. The following are the other cost estimates:
Cost per student
Breakfast Rs.20 Lunch 30
Tea 5 Lease rent 1000 per bus
Special permit fee 200
Mementoes to the speaker during Guest lec. 300 per speaker (for each batch of 75 students.)
Award to the Best Report writer 500; Prepare a flexible budget for the levels of 100, 150, 200, 250 and 300
students. Compare the average cost per students at these levels

2.The expenes budgeted for production of 10000 units in a factory are furnished below:
Materials 70 per unit Variable fy ohs 20 per unit
Labour 25 per unit fixed fy ohs 100000
Variable expenses direct 5 per unitselling expenses 10 % fixed 13 per unit
Distribution expenses 20 % fixed 7 per unit administrative expenses Fixed-50000 Rs.5 perunit

Prepare a flexible budget for the production of 6000 and 8000 units

3. The static budget for the college book division of chasse and Joos publishers estimated sales revenue of
R.5000000 on sales of 1650000 units. The variable production costs (cost of goods sold) were estimated at
Rs.20,62,50,000 or Rs.1,250 per unit sold. Acutal results for the company exceeded expectations, with revenue of
over Rs.55,00,00,000 on sale of 1,80,000 units. However, the production manager was diappointed to see that the
actual variable production costs Rs.22,00,00,000 exceeded the costs in the static budget by Rs.1,37,50,000. the
production manager did not understand why his costs were so much higher than the budget amount. If anything, he
thought that his division had been very efficient and that costs should have been lower than reflected in the budget
Required: explain why the production manger’s actual costs exceeded the amount estimated in the static budget.
Should the production division be disappointed with the results (Text bk pg. no.234, problem 19 )

Production Budget
ABC Ltd. Produces and sells a single product. Sales budge for the year 2011 by quarters is as under:
Quarter I II III IV
Units 6000 9000 6000 12000
Company expects to have opening stock of 2000 units and have clg stock of 3000 units. Two-thirds of the current
quarter’s sales demand plus one-third of the succeeding quarter’s dd. The cost details for one unit of t product are
Direct material 10 lbs @ .50 per lb
Direct labour 1 hr @ 4 per hour
Variable overheads 1 hr @ Rs.2 per hour
Fixed overhead 2 hrs @ Rs.3 per hour
Required: Prepare production budget for selling price of Rs.20 and in which quarter the expected to break-even

Review problems from Text pg no. 230

problem no. 1, , 14, 2 and 3 ( Fill in the blanks, sales budget and production budget)
problem no.13 (flexible budget)

Review questions from the Text

  Some of the characteristics of a typical budget
 Outline using no amounts a budget that you might use in managing your personal finances
 Why is the sales budget the most important piece of the budgeting process
 List and describe some of the major factors and information sources typically used in sales
forecasting
 What are the essential elements of a production budget
 What are several decisions that mgt can address by using the cash receipts budget
 Why is so much emphasis put on cash flow in the budgeting process
 Discuss why financial budgets for merchandising companies are different from those
manufacturing companies
 Discuss the difference between static (fixed) and flexible budget)

Review problems from Text pg no. 230

problem no. 1, , 14, 2 and 3 ( Fill in the blanks, sales budget and production budget)
problem no.13 (flexible budget)

for more reference work, refer Google book –Cost Accounting by Jawahar link

http://books.google.co.in/books?
id=1KklpFKeT6EC&pg=PA932&dq=Budgetary+control+Cost+Accounting&hl=en&sa=X&ei=2OvOUISyJYyH
rAeY8oHYBA&sqi=2&ved=0CDsQ6wEwAQ#v=onepage&q=Budgetary%20control%20Cost
%20Accounting&f=false