Budgetary Planning and Control Cycle

1) Stages in Budget Preparation

Initially, every organization sets a mission which involves the
overall aims and goals of the organization.
STEP 1: Identify Objectives which needs to be specific which
every organization has.
Where do we want to be or what is our aim?
a) Type of Business to be involved
b) Product/Services to be sold and its growth
c) Markets to be served
d) Profit and its Growth
e) Market Share and its Growth
f) Better Quality Products than anyone else
STEP 2: Identify Potential Strategies/Search for alternative
Courses of Action
Where do we organization wants to be by gathering the alternative
courses of action?
Example: New Markets for Existing Products, New Products for
Existing Markets and New Products of New markets.
STEP 3: Gather Data about the alternatives
It’s also called information gathering stage do
It’s to ensure to ensure that where the organization is right now.
This is known as a position Audit or Strategic Analysis.
1) Internal Information to the organization like
a. Resources Available like Funds , Materials , Labour and
so on Everything that is Required for Smooth operations
b. Manufacturing Capacity and Capability
c. Technical Know-how
d. Market Position
e. Liquidity Position
f. And Others that is internal to the organization
2) Information available externally
a. Competitor and its action
b. Possible options in the Market
c. And So on others doing SWOT Analysis
STEP 4: Evaluate Strategies doing Suitability[S], Feasibility [F]
and Acceptability [A] Analysis and Select/Choose Alternative
Courses of Action.
Choose from the Evaluation and co-ordinate them into a long
term plan, commonly expressed in financial terms
a) Capital Expenditure Plans
b) Projected Cash Flows
c) Projected Statement of Financial Position
STEP 5: Implement Short Term Plan in the Form of Annual
Budgets
If Various Strategies are taken at the start of the year
1) Strategy A may take two and a Half Years
2) Strategy B may take 5 months but will only start after Year 3.
3) Strategy C may take one year and has no specific start date as of
now
In General, organization doesn’t work on the basis of time
allocated for each strategy but break down the parts as a whole
into a specific time period and work on for the strategy as it falls
on that particular period. The resulting short term plan is called
budget.
Up to Step 5 its Planning Process and below its control Process
STEP 6: Measures Actual Results and Compare with plan.
At the end of the year compare the actual results with the plan and
make comparison to identify the divergences form the plan and its
reasons. It’s generally termed as performance assessment with long
 term plans which has annual breakdowns. This aspects of control
is carried out by senior management, on annual basis.
STEP 7: Respond to the Divergences in Plan.
Identifying the inefficiencies and take Corrective Action Required
to achieve planned outcomes.
How are Budgets Prepared?
Long term objectives are prepared and then its breakdown is represented
by annual budgets. After this;
1) Budget Committee is formed which is made up of the Chief
Executive, Budget Officer[Management Accountant] and
management personnel from every major area of the organization,
such as production, sales, and so on known as departmental or
functional heads. They are responsible for communicating policy
guidelines known as Budget Manual to the people who prepare the
budgets and for setting/approving budgets.
2) Budget Manual is produced for providing instructions to the
preparation and use of the budgets. It also includes the details of
the responsibilities of those involved in the budgeting process
including the organization chart and a list of budget holders.
3) Limiting Factor/ Principal Budget Factor is identified which is the
starting point for preparing the budget. Generally for most of the
companies, the principal budget factor will be sales demand as
company will be producing the sales units as many as the
customers are prepared to buy the product. But it could also be
anything else, for example, the availability of special labour skills.
Functional Budgets
1) Sales Budget
Sales = Sales Units * Selling Price per Unit
Example 1: Illustration 2 Form Kaplan Text
Example 2: Test Your Understanding 2 Form Kaplan Text
 2) Production Budget
Budgeted Production Units
= Budgeted Sales Units – Opening Stock of Finished Goods
+Closing Stock of Finished Goods
Example 1: Illustration 3 Form Kaplan Text
3) Material Budget
It includes two budgets
a) Materials Usage Budget
=Budgeted Production Units*Material Qty Requirement for
One Unit
b) Materials Purchase Budget
=Budgeted Material Usage – Opening Stock of Raw Materials
+Closing Stock of Raw Materials
Example 1: Illustration 4 Form Kaplan Text
4) Labour Budget
= Budgeted Production Units * Labour Requirement * Rate per
Labour Requirement
Example 1: Illustration 5 Form Kaplan Text
Example 2: Test Your Understanding 2 Form Kaplan Text
5) Overhead Budget
= Budgeted Production Units * Overhead Requirement * Rate per
Requirement
Example 1: Illustration 6 Form Kaplan Text
Overall Question:
Test Your Understanding 3 Form Kaplan Text