KAMPALA INTERNATIONAL UNIVERSITY

COLLEGE OF ECONOMICS AND MANAGEMENT

COURSE UNIT : FUNDAMENTALS OF ACCOUNTING

YEAR : TWO

SEMESTER : ONE

SESSION : EVENING

GROUP 1

NO. NAME REG NUMBER COURSE SIGN

1. NABUKENYA RACHEAL 2023-01-14118 BBA
2. KUKUNDAKWE WILBER 2023-01-13539 BBA
3. KEMIGISA DOREEN ESTHER 2023-01-14236 BBA
4. BABU IVAN 2022-08-12992 BBA

QUESTIONS
Introductions to budgeting and the preparation of forecast financial statements as well
as objectives of budgeting, types and functional of budgets and advantages of
budgeting as well as problems of budgeting
A budget is a document that translates plans into money - money that will need to be
spent to get your planned activities done (expenditure) and money that will need to be
generated to cover the costs of getting the work done (income). It is an estimate, or
informed guess, about what you will need in monetary terms to do your work.

Budgeting is a crucial financial planning and management process that involves

estimating and allocating resources to achieve specific goals and objectives. It provides
a framework for organizations to plan, control, and monitor their financial activities. In
the context of budgeting, the preparation of forecast financial statements plays a vital
role in projecting future financial performance based on anticipated revenues,
expenses, and other financial factors.

Budgeting involves creating a comprehensive plan that outlines the financial resources
required and how they will be allocated across various activities and departments within
an organization. It typically covers a specific period, such as a fiscal year, and serves as
a financial roadmap for the organization's operations.

Forecast financial statements, on the other hand, provide an estimate of an

organization's future financial position, performance, and cash flows. These statements,
including the income statement, balance sheet, and cash flow statement, project the
expected financial outcomes based on assumptions about revenues, expenses,
investments, and financing activities.

Budget Classifications

Activity-Based Budget

Activity-based budgets are the budgets for the cost of individual activities. With activity-
based budgeting, all costs are allocated to cost centers and then assigns to activities.
Product or customers are allocated the cost based on the amount of the activity they
consume. Activity-based budgets and shirt performance Improvement and cost
reduction. 5th activity-based budgeting requires a new budgeting model, it requires
careful planning and implementation
Add-On Budget

An add-on budget is a budget based on the previous year’s budget that has been
adjusted for current information. Out on budgets can adjust for new requirements,
changes in employee wage rate, and levels of inflation.

Bracket Budget

A bracket budget is a budget at both higher and lower levels than the base estimate.
Bracket budgets are basically contingency plans for downside risks. Budgets like this
allow management to estimate and impact of decreased sales on earnings. With bracket
budgeting, managers can identify potential problems and acceptable profit levels. This
way, management can test various alternatives to improve the planning process.

Continuous (or Rolling) Budget

A continuous or rolling budget is a budget that is revised regularly. As the accounting

period ends a new budget period is added. For instance, the budget can be extended
for another month or quarter at the end of each month or quarter. As a result of
continuous budgets are based on the most recent info for proper planning and
performance. However, continuous budgets do require continuous planning.

Rolling Forecast

A rolling forecast isn’t really a budget but instead of regular update to the sales
forecast. Most often, it is done on a monthly basis. The companies then model that
short-term spending based on the expected sales level. It is easy to update and
requires no budgeting infrastructure.

Incremental Budget

Incremental what is adjusted for instrumental increases in terms of percentages or

dollar amount. Historically, incremental budgeting has been the most common
budgeting method. It is based on the previous year’s expenses. With incremental
budgeting, each line item receives the same incremental adjustment, such as a 10%
increase or decrease, for the next budget cycle.

It’s possible to separate projects into multiple increments. Each increment can be
allocated labor and other resources to finish the project.

Incremental budgets however do have multiple drawbacks. Because they are based on
aggregate data they may not always be accurate. They may not match company
targets and may lead to over or under funding in certain areas of the business.

Strategic Budget

The strategic budget is adjusted for strategic planning. They are used under conditions
that are unstable or uncertain. It uses a mixture of top-down where top management
allocates resources and bottom-up approaches where the lower management also
participates in resource allocation.

Stretch Budget

A stretch budget is a budget based on sales and marketing forecasts higher than
estimates. They aren’t used to estimate expenses. Expenses are estimated at the
budget target. Stretch budgets are often complex and subjective.

Supplemental Budget

A supplemental budget is a budget for an area that is not included in the main budget.

Target Budget

A target budget is a budget that matches major expenses to the company’s goals.

Any and all of these budgets are part of a company’s overall financial plan.

Companies may also have long-term or short-term budgets. Long term budgets are for
a year or more and are not for immediate use. Short-term budgets, on the other hand,
are meant for a year or less and are created with guidance from the long-term budget.
Of the budgeting models covered here, the static model is the most common.
Alternatively, companies may wish to use a rolling forecast to adjust expenditures on
the fly, to ensure it’s possible to match short-term sales goals. It is highly flexible, so
the rolling forecast approach is often the more productive budget model. Forecasting
helps guide business decisions with real-data, making it possible to choose the best
course of action based on the current state of affairs.

Objectives of Budgeting:

The objectives of budgeting can vary depending on the organization's size, nature of
operations, and strategic goals. However, some common objectives of budgeting
include:

Planning and Goal Setting:

Budgeting helps organizations set financial goals and plan for their achievement. It
provides a structured approach to determine the financial resources needed to support
strategic initiatives, expansion plans, and operational objectives. By setting specific
targets and milestones, budgeting facilitates better financial decision-making and
resource allocation.

Resource Allocation and Utilization:

Budgeting ensures that financial resources are allocated efficiently and effectively. It
helps identify priorities, allocate funds to different departments or projects, and
optimize resource utilization. Through budgeting, organizations can allocate resources
based on their strategic importance and assess the cost-effectiveness of various
activities.

Performance Evaluation and Control:

Budgeting enables organizations to monitor and evaluate their financial performance.

By comparing actual financial results to the budgeted amounts, organizations can
identify variations, analyze the reasons behind them, and take corrective actions if
necessary. Budgets serve as benchmarks for assessing performance and provide a basis
for financial accountability.

Decision Making and Risk Management:

Budgeting assists in making informed financial decisions and managing risks. By

considering different scenarios and conducting sensitivity analyses within the budgeting
process, organizations can evaluate the potential impact of various factors and
uncertainties on their financial position. This helps in identifying potential risks,
exploring alternative strategies, and making sound financial decisions.

Communication and Coordination:

Budgeting facilitates communication and coordination within an organization. It ensures

that different departments and stakeholders are aligned with the financial objectives
and understand their roles in achieving them. Budgets serve as a common financial
language, promoting transparency, accountability, and collaboration across the
organization.

Cash Flow Management:

Effective budgeting helps organizations manage their cash flow by forecasting and
planning for inflows and outflows of funds. By considering anticipated revenues and
expenses, organizations can identify potential cash shortfalls or surpluses and take
proactive measures to ensure sufficient liquidity. Budgeting assists in monitoring cash
flow patterns, optimizing working capital, and managing financial obligations.

Motivating and Aligning Behavior:

Budgeting can serve as a tool to motivate and align the behavior of individuals and
departments within an organization. By setting financial targets and linking them to
performance evaluations and incentives, budgeting creates a sense of accountability
and encourages employees to work towards achieving the organization's financial goals.
Budgets can also foster coordination and collaboration among different departments,
promoting a shared sense of responsibility for financial outcomes.

Long-Term Financial Planning:

Budgeting supports long-term financial planning by considering the organization's future

financial needs and sustainability. It helps in identifying investment requirements,
capital expenditure plans, and financing strategies. Budgets can incorporate projections
for future growth, market conditions, and industry trends, enabling organizations to
make informed decisions about resource allocation, expansion initiatives, and strategic
investments.

Types of budgets

There are several types of budgets that organizations employ to fulfill different
purposes. Here are some common types of budgets:

Master Budget

A master budget refers to a set of financial and operating budgets for a specific
accounting period. Typically, it is used for the following calendar year or fiscal year.
These budgets are prepared quarterly or annually. The master budget format varies
with the business nature in size. Operating budgets are used in daily operations and
serve as the basis for financial budgets.

Operating budgets include sales, production, direct labor, direct materials, overhead,
administrative expenses, selling, cost of goods manufactured, and cost of goods sold.
Financial budgets include a budgeted income statement along with a balance sheet,
cash budget, and capital expenditures budget. Budgeted income statement and
budgeted balance sheets are also known as pro forma financial statements.

Operating Budget
The operating budget refers to the budget for income statement elements including
revenue and expenses. Within this budget, you may have several other smaller
budgets, such as:

 Production Budget: This plans the production from the number of units and cost
to the types of products, plant capacity, operating cycle, make or buy policy, etc.
for the budgeting period. This budget is typically based on the sales budget. It is
the responsibility of the production manager.

 Sales Budget: The planned sales in both quantity and value. The sales are
forecasted for the period, which is the sales manager’s responsibility.

 Purchase Budget: This plans for each purchased item that each department
purchases. The purchase manager has to make this budget so that each
department can make bulk purchases.

 Production Cost Budget: Also known as the manufacturing cost or work cost
budget, this includes the cost of raw material, labor, direct expenses, and factory
overheads. It shows the cost of production for the units that are budgeted for
production.

 Overheads Budget: This includes the factory overheads budget, the

administrative overheads budget, and the selling and distribution budget along
with others like the plant utilization budget and research and development
budget. The factory overhead factors in things such as the indirect labor cost,
indirect material cost, and other indirect expenses.

Financial Budget

The financial budget refers to the budget for the balance sheet elements. The financial
budget sandals the expected assets, liabilities, and stockholders equity.

Understanding the types of budgets and their classifications are crucial to successful
operations and profitability.
Cash Budget

A cash budget is a budget for expected cash inflows and outflows for the budgeted
period of time. It consists of four sections:

 Receipts: This area lists the beginning cash balance along with cash collections
from customers and others.

 Disbursements: This area shows all of the cash payments as characterized by

their purpose.

 Cash Surplus or Deficit: In this section, the difference between the cash receipts
and cash disbursements is listed either as a surplus or a deficit.

 Financing: This takes a look at the detail of expected borrowings and repayments
for the period.

It is intended to provide a picture of expected cash flow.

Static Budget

Also known as a fixed budget, this is the budget at the expected capacity level. Because
it is fixed, it is usually used by stable companies. This kind of budget can be used
by departments with operations that are independent of capacity levels. For instance,
operations of general marketing departments and administrative departments don’t
usually depend on the level of production and sales, as procurement would. Instead,
they are determined by the department’s managers and as a result, the static budget
can be used by the department.

Flexible Budget

Also known as the expense budget, the flexible budget is the budget at the actual
capacity level. This budget is dynamic so it is commonly used by organizations. Flexible
budgets are adjusted to the actual activity of a company.

These types of budgets can easily be prepared with a computerized spreadsheet like
Excel. The relative relevant activity range is determined for the coming accounting
period. Then, costs that are to be expected as incurred over the relevant range are
analyzed. The costs are separated based on their cost Behavior whether it be mixed,
variable, or fixed. Finally, the flexible budget for variable cost and different points
throughout the range is prepared. Flexible budgets match expenses to specific revenue
levels or activity levels. For instance, the utility costs can be correlated to the number of
machines that are in operation.

Capital Expenditure Budget

The capital expenditure budget refers to the budget for expected investments in capital
assets and long-term projects. Typically it is prepared for 3 to 10 years. Investments
and capital assets include purchases of fixed assets such as buildings, Machinery,
equipment, lands, or plants. Long-term projects may be designed to develop new
products, reduce costs, expand existing product lines. Sometimes a Capital project
committee is built to oversee the capital budgeting process. The committee is usually
separated from the budgeting committee.

Program Budgets

A program budget is a budget for a specific program or activity such as research and
development, engineering, training, marketing, or public relations. Program budgets are
created for product lines. As program budgets are typically generated for activities
across multiple departments these budgets cannot be used for control purposes.

Zero-Based Budgeting

With zero-based budgeting (ZBB), you must determine what outcomes management
wants and develop a package of expenditures to sport that outcome. Combining various
outcome expenditure packages create a budget that should result in a specific set of
outcomes for the entire company. This approach is most useful for service-level entities
such as government where the provision of services is crucial. It does however take a
considerable amount of time to develop compared to a static budget.

Importance of budgeting
Planning and Goal Setting:

Budgets play a crucial role in the planning process by establishing financial goals and
objectives. They provide a roadmap for the organization's activities and guide decision-
making by outlining expected revenues, expenses, and resource allocations. Budgets
enable organizations to set realistic targets, align their actions with strategic priorities,
and ensure that resources are allocated efficiently to achieve desired outcomes.

Resource Allocation and Efficiency:

Budgets help allocate scarce resources effectively. By estimating and allocating funds to
different departments, projects, or activities, budgets ensure that resources are
distributed based on strategic priorities and operational needs. Budgets enable
organizations to optimize resource utilization, identify areas of inefficiency, and make
informed decisions about resource reallocation or cost-saving measures.

Performance Evaluation and Control:

Budgets serve as benchmarks for evaluating actual performance against planned

targets. They provide a basis for performance measurement and comparison, enabling
organizations to assess their financial progress and identify deviations or variances. By
monitoring and analyzing budget variances, organizations can identify areas of concern,
take corrective actions, and improve financial control and accountability.

Decision Making and Forecasting:

Budgets facilitate informed decision-making by providing financial information and

projections. They help organizations evaluate the financial implications of different
options, assess risks, and make strategic choices. Budgets also support forecasting by
projecting future financial outcomes based on assumptions and anticipated changes.
This enables organizations to anticipate financial needs, plan for contingencies, and
make proactive decisions to achieve desired financial results.
Communication and Coordination:

Budgets promote communication and coordination within an organization. They provide

a common financial language and framework for discussions among stakeholders, such
as management, departments, and employees. Budgets foster transparency by
communicating financial expectations and objectives to all levels of the organization.
They also facilitate coordination and collaboration among departments by aligning their
activities and ensuring that they work towards shared financial goals.

Motivation and Performance Incentives:

Budgets can serve as motivational tools by linking financial targets to performance

incentives. By setting challenging but achievable goals and tying them to rewards or
recognition, budgets can drive employee engagement, productivity, and accountability.
Budgets create a sense of ownership and responsibility for financial outcomes,
encouraging individuals and teams to strive for excellence and contribute to the
organization's success.

Financial Monitoring and Risk Management:

Budgets enable organizations to monitor their financial health and manage risks. By
regularly reviewing budget performance and variances, organizations can identify
potential financial challenges, such as cash flow issues or cost overruns, and take
proactive measures to mitigate risks. Budgets provide a structured framework for
financial monitoring, helping organizations maintain financial stability, manage
uncertainties, and make timely adjustments to their operations.

Problems of Budgeting:

Rigidity and Inflexibility:

Budgets can become rigid and inflexible, especially when circumstances change. They
may not accommodate unexpected events, market fluctuations, or evolving business
conditions. This can limit an organization's ability to respond and adapt effectively,
leading to inefficient resource allocation or missed opportunities.
Time and Effort:

Preparing, reviewing, and monitoring budgets requires significant time and effort. The
budgeting process can be resource-intensive, involving data collection, analysis, and
coordination among various stakeholders. This can divert attention from other critical
activities and create additional administrative burdens.

Unrealistic Assumptions:

Budgets are based on assumptions about future conditions, such as sales growth rates
or cost projections. If these assumptions are unrealistic or inaccurate, it can lead to
unreliable budget estimates and undermine the effectiveness of financial planning and
decision-making.

Budgetary Slack:

Budgetary slack refers to intentionally overestimating expenses or underestimating

revenues to create a buffer or cushion within the budget. While it may provide a sense
of security, it can lead to inefficiency and suboptimal resource allocation. Budgetary
slack can also undermine the accuracy and reliability of budgeted financial information.

Behavioral Impacts:

Budgets can sometimes generate unintended behavioral impacts within an organization.

For example, employees may focus on meeting budget targets rather than pursuing
long-term value creation or innovation. This can lead to suboptimal decision-making,
reduced motivation, or a reluctance to take calculated risks.

Short-Term Orientation:

Budgets often focus on short-term financial targets, which may overshadow long-term
strategic goals. This short-term orientation can limit an organization's ability to invest in
innovation, research and development, or other initiatives that may yield long-term
benefits but have a longer payback period.

Lack of Alignment with Strategy:

If budgets are not aligned with the organization's strategic objectives, they may not
effectively support the achievement of long-term goals. Misalignment can lead to
suboptimal resource allocation, missed opportunities, and a lack of coherence between
financial planning and the overall strategic direction of the organization.

In conclusion , budgeting is a strategic financial planning process that involves the

preparation of forecast financial statements. It helps organizations plan, allocate, and
control financial resources to achieve specific objectives. The objectives of budgeting
include planning, resource allocation, performance evaluation, decision making, risk
management, and fostering communication and coordination within the organization.
References

Cliche, P. (2012). "Budget", in L. Côté and J.-F. Savard (eds.), Encyclopedic Dictionary
of Public Administration,
[online], http://www.dictionnaire.enap.ca/Dictionnaire/en/home.aspx Archived 2012-11-
05 at the Wayback Machine

"Constitutional Balanced Budget Amendment Poses Serious Risks". Center on Budget

and Policy Priorities. Retrieved 2022-07-13.

"§015l. (CB) Line Item Veto". Budget Counsel. 2016-11-15. Retrieved 2022-07-13.

Jonas Elmerraji (2021). How Budgeting Works for Companies, investopedia.com