Budgeting

A budget is a plan expressed in quantitative terms.

Aims of budgeting

 Planning
 Controlling
 Coordination
 Communication
 Motivation
 Evaluation
 Authorisation
Stages in the budget

 Budget committee
 Budget manual
 Limitating factor identification
 Final steps- Preparation
- Integration
- Review

Continuous budgets(Rolling budgets)

- Adding accounting periods to the budget

Functional budgets- Budget for each function

1. Sales 4. Material purchases
2. Production 5. Labour budget
3. Materials usage 6. Overhead budget
Sales and production budgets
Opening inventory of Finished goods x
Add: Production x
Less: Sales (x)
Closing inventory of finished goods x

Material purchases and usage budget

Opening inventory of Raw materials x
Add: Purchases x
Less: Usage (x)
Closing inventory of Raw materials x
Labour budget ( labour hrs)and overheads budget ( OAR)use same pattern
Fixed, Flexible and Flexed budgets
Budgetary control
Budget agreed
↓
Expenditure incurred ← ← ←↑
↓
Differences analysed ↑Feed back for revision of
performance
↓
Reasons sought, obtained and follow-up by management→↑
Fixed budget
In such budgets activity levels are ignored and comparison is made in absolute terms
Example
Budget Actual Variance
Sales(Units) 1000 1200
Sales($) 10000 11500 1500 Favourable
Adverse variance(A)- Decreases profit
Favourable variance(F)- Increases profit
Such comparison are not relevant since they do not compare like with like
Flexed budget
Designed to reflect budget for actual activity level
Example 500 units(50%) 750 units(75%) 1000 units(100%)
Variable costs 5000 7500 10000
Fixed costs 15000 15000 15000
Total costs 20000 22500 25000