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STAGES IN BUDGETING PROCESS

There are 8 stages in budgeting process. The


stages as follows:
Communicating detail of budget policy.
Determining the factor that restricts performance.
Preparation of the sales budget.
Initial preparation budgets.
Negotiation of budgets.
Coordination and review of budgets.
Final acceptance of the budget.
Budget review.

Communicating detail of the


budget policy.
The top manager should communicate to his worker before any
budgets have been made.
In the communication, the manager should communicate about:

Policy effect of long term plan. To those responsible for preparing the current
years budget. Policy might include change in sales mix or the expansion or
contraction of certain activity.
Budget need to be specified. Example, allowance for price and wage increase
and expected change in activity.
Expected changes in industry demand and output.

The top management should talk about it, to make sure all managers
be made aware of the policy of top management for implementing the
long-term plant in the current year budget. So, common guidelines
can be established. It also prepare the manager for preparing budgets
how they should respond to any expected environment changes.

Determining the factor that


restricts performance.
To determine the point at which
annual budgeting process should
begin. Examples, restricts
performance on sales demand or
when sales demand is in excess of
available capacity.

Preparation of the sales budget.


Preparations of the sales budget are
made on:
Volume of sales and sales mix.
Determine level of a companys operations
when sales demand is the restricts output.

Total sales revenue, most important and


difficult plan in annual budgeting process.
It depends on the action of customer. Sales
demand may be influenced by state of the
economy or the action of the competitors.

Initial preparation of budget.


There are two way to do budgeting. They are:
Bottom-up process.
Budget should originate at the lowest level of management and
be refined and coordinated at higher level.
Reasons:
Enable managers to participate in the preparation of the budget.
Increases the probability that they will accept the budget and strive to
achieve budget target

Past data.
Useful guild line
Guideline provided by top management.
Example: guild line may provide specific instruction and
permitted changes that can be made in the prices of purchases
of material and services.

Negotiation of budgets.
It determine whether the budget become
really effective management tool or just
a routine to follow.
If managers are successful in establishing
a position or trust and confidence with
their subordinate, negotiate process will
produce a meaningful improvement in
the budgetary process and outcomes for
the period.

How the negotiation process


happened.

Dept A
2

Manager
of plant 1

3
Dept B
4

Productio
n
manager

5
Dept C
6

Manager
of plant 2

7
Dept D
8

The lower-level managers are represented by boxes 1-8 managers.


Managers 1 and 2 will prepare their budgets in accordance with the budget
and the guild lines laid down by top management. The managers will
submit their budget to their supervisor, who is in charge of the whole
department (department A).
Once these budgets have been agreed by manager of department A, they
will combined by the department manager, who will then present this
budget to their superior (manager plan 1).
The manager of plan 1 also responsible for department B, and will combine
the agreed budgets for departments A and B before representing the
combine budget to their supervisor (the production manager).
The production manager will merge the budget for plant 1 and 2, and this
final budget will represent the production budget that will be presented to
the budget committee for approval.

Negotiated between the budgetee and their


participate until arrive final stage.
The superior does not revise the budget without giving
full consideration to the subordinates arguments for
add any budgeted item.
If real participate not taking place, subordinate will be
motivate to achieve a budget that they did not accept.
Budget should not:
Easily attainable budget.
Understated budget.
Difficult target.
* It may achieve the target but only in short-term.

* It will cost less morale increase labour turnover in


future.

Coordination and review of


budgets
Review process.

Individual budget must move up in the organization hierarchy of the


negotiation process.
It must be examined in relation to each other.
It may indicate that some budget are out of balance with other budget.
The budget need modifying so that they will compiletable with other
conditions, constrains and plans that beyond manager knowledge or
control.
Example:
Plant manager want to replace new equipment in the budget when funds are simply
not available.
The accountant must identify such inconsistencies and bring them to attention of
the appropriate manager.
Any changes in the budget should be made by the responsible manager.
The budget need to redo for second or even third time until all budget are
coordinated and accepted by all parties involve.

Coordination Process.
Budgeted profit and loss account, a
balance sheet and cash flow
statement should be prepare to
ensure that all parts combine to
produce an acceptable whole or need
adjustment and budget need redo
until them approve.

Final acceptance of the budget.


All the budget will be summarized in
master budget. After approve,
budget will be given back through
the organization to the appropriate
responsibility centre. Approve master
budget is the authority for the
manager to carry out the plan in
each budget.

Budget review.

Budgeting not stop when budgets have been agreed.


The actual result should be compared with the budget result.
It cans maximum motivational impact.
It enable management to identify the items that are not
proceeding according to plan and investigate the reasons for the
differences.
Budget committee should:
Periodically evaluate the actual performance and reappraise the
company future plans.
If many changes in actual condition, budget plan need adjusted.
This revised budget then represents a revised statement of formal
operating plants for the remaining portion of budgeted period.
Budgeting process should not end for the current year once the budget
has starts, it should be continuous and dynamic process.

Sales budget.
Shows the quantities of each product that
the company plans to sell and intended
selling price. It provides the prediction of
total revenue from which cash receipts
from the customer will estimated and it
also supplies the basic data to
constructing budgets for production cost
and for selling, distribution and
administrative expenses. It is a
foundation for all other budget.

Example:
Royal company is preparing budget for ending 30 June.
Budgeted unit sell for next month are:
April-20,000 unit
May-50,000 unit
June-30,000 unit
*selling price RM 10 per unit.
Month
Unit
Sold
Selling
Price
Total

April

May

June

Quarter

20,000

50,000

30,000

100,000

RM10

RM10

RM10

RM10

RM200,0 RM500,0 RM300,00 RM1,000,0


00
00
0
00

Production budget budgeted


inventory levels.
It expressed in quantities only and is
the responsibility of production
manager. Objective is to ensure that
production is sufficient to meet sales
demand and economic inventory
levels are maintained.

Example:
The management at Royal company
want ending inventory on April, May
and June are 10,000, 6,000 and
5,000. On 31 March, 4,000 unit were
Quarte
on hand.
Month
April
May
June
Unit sold
Add: planned closing
inventory
Total unit required for
sales and inventory
Less: planned opening
inventory
Unit to be produce

20,00
0
10,00
0
30,00
0
4,000
26,00
0

r
100,00
0

50,00
0

30,000

6,000

5,000

5,000

35,000

105,00
0

6,000

4,000

29,000

101,00
0

56,00
0
10,00
0
46,00
0

Direct materials usage budget.


It estimates of the materials which
are required to meet production
budget.
Example:
At royal company 5kg of material
Quarte
required
per unit
product.
Month
Aprilof May
June
r
Units

26,000

46,000

29,000

101,00
0

Material per
units

5Kg

5Kg

5Kg

5Kg

Total

130,00
0

230,00
0

145,00
0

505,00
0

Direct materials purchase


budget
It is responsibility of purchasing
manager and responsible for
obtaining the planned quantities of
raw materials to meet production
requirement. Objective is to purchase
these materials at the right time at
the planned purchase price. It is
necessary to take into account the
planned raw material inventory
levels.

Example:
Management want materials on hand
at the end of month April, May and
June equal to 23,000, 14,500 and
11,500. On 31 March, 13,000 kg
materials are on hand. Materials are
Quarte
cost RM0.40
per kg.
Month
April
May
June
Total unit

130,000

230,00
0

145,00
0

r
505,00
0

Add: planned closing


inventory

23,000

14,500

11,500

49,000

153,000

244,50
0

156,50
0

554,00
0

13,000

23,000

14,500

50,500

221,50

142,00

503,50

Less: planned opening


inventory
Total unit need to be