CHAPTER 14

BUDGETING
 BUDGETING
A BUDGET IS A PLAN EXPRESSED IN MONETARY TERMS
COVERING A FUTURE TIME PERIOD (TYPICALLY A YEAR
BROKEN DOWN INTO MONTHS)

Incremental Priority-based Zero-based Activity-based

budgets budgets budgeting budgeting
 THE BUDGETING PROCESS

Developing
Identify Business detailed sales
Objectives budget Board Approval

Forecasting Preparing Budget of

1. Production
2. Non production
3. CAPEX
4. Cash Forecast
5. Master Budget
 CASH FORECASTING
The purpose of the cash forecast is to ensure that sufficient cash is available to meet the level of
activity planned by the sales and production budgets and to meet all the other cash inflows and
outflows of the business

Cash vs Profit Forecasting

• the timing difference between when income is earned and when it is received (i.e. debtors)
• increases or decreases in inventory for both raw materials and finished goods
• the timing difference between when expenses are incurred and when they are paid (i.e.
creditors)
• non-cash expenses (e.g. depreciation)
• capital expenditure
• income tax
• Dividends
• new loans and loan repayments
 Theoretical perspectives on
budgeting
• Buckley and McKenna (1972) emphasized the importance of participation in the budget process;
frequent communications and information flow throughout the organization; inclusion of the
budget in decisions about salary, bonuses and career promotion; and clear communication

• Lowe and Shaw (1968) identified three sources of forecasting error: unpredicted changes in the
environment; inaccurate assessment of the effects of predicted changes; and forecasting bias.

• Otley and Berry (1979) argued that quite mild deviations from ‘expectation budgets’ at the unit
level can produce severe distortions when budgets are aggregated to the organizational level.
THANK YOU