Definition of Budget

Budget is a forward planning to estimate of

income and expenditure for a set period of time.
 Common Characteristics
•  Budget should be simple.
• It should be flexible. It should be adjust various needs and conditions
of the institution.
• It should be synthesis of past , present and future.
• Budget is composed of two segments that are income and
expenditure.
• Budget is forward planning.
• It should have support of top management throughout the period of its
planning and supplementation.
 PURPOSES OF BUDGET
• To provide definite targets for income and expenditure of the
department.
• To co-ordinate the activities of different functional heads in the
working of these departmental budget.
• To provide useful tool for the control of costs.
• To improve financial planning and decision making.
• To identify controllable and uncontrollable cost area.
  TYPES OF BUDGET 
1.  INCREMENTAL BUDGET: Is one based on estimated changes in
present operation, plus a percentage increase for inflation, all of which
is added to previous year budget.
2. FLEXIBLE BUDGET: It consists of several financial plans each for a
different level of program activity. it is based on the fact, that operating
conditions rarely conform to expectations.
3. ROLLOVER BUDGET: Is one that forecasts program, revenues and
expenses for a period greater than a year, to accommodate program that
are larger than annual budget cycle.
 TYPES OF BUDGET
4. OPEN ENDED BUDGET: Is a financial plan in which each operating
manager presents a single cost estimate for what is considered optimal
activity level for each program in the unit, without indicating how the
budget should be scaled down if less funding is available.
5. FIXED-CEILING BUDGET: Is a financial plan in which the uppermost
spending limits are set by the top executive the unit and the divisional
managers develop budget proposals for their areas of responsibility.
6. PERFORMANCE BUDGET:Is based on functions, which allocate
functions, not divisions, e.g.-direct nursing care, in service education,
quality improvement , nursing research.
 TYPES OF BUDGET
7. PROGRAMME BUDGET: Is one where costs are computed for a
total program , i.e. group total costs for each service program, e.g.
MCH,FP,UIP etc.
8. PRODUCTION BUDGET: Is the budget that aims at securing the
economical manufacture of products and maximizing the utilization of
production facilities.
9. REVENUE AND EXPENSE BUDGET: Is expressed in financial
terms and tasks the nature of a Performa income statement for the
future. It may be prepared in a detail form or in an abstract statement
showing the items of profit and loss under classified headings.
 TYPES OF BUDGET
10. CAPITAL EXPENDITURE BUDGET: Is prepared for assuring
planned timely capital investment in the business to ensure the
availability of capital at the right time over longer period.
11. ZERO BASED BUDGET: Requires the nurse manager to examine,
justify each cost of every program both old and new , in every annual
budget preparation.
12. SUNSET BUDGET: Is designed to “self destruct” within a
prescribed time period to ensure the cessation of spend in by a
predetermined date.
 TYPES OF BUDGET
13. SALES BUDGET: Is the starting point in any budgetary program ,
since sales are basic activities which give shape to other activities. Sale
budgets are compiled in terms of quality as well as of value.

14. CASH BUDGET: Is prepared by way of projecting the possible cash

receipts and payments over the budget period.
Components of the Master Budget
Sales Budget

Production
Budget

Direct Material Direct Labor Overhead Operating

Budget Budget Budget Budgets

Selling &
Administrative
Expense Budget

Budget Income
Statement

Capital
Budgeted Financial
Expenditure Cash Budget
Balance Sheet Budgets
Budget
Preparing the Operating Budgets
 Sales Budget
• The sales budget is the first budget prepared.
• Each of the other budgets depends on the sales budget.
• It is derived from the sales forecast, and it represents management’s
best estimate of sales revenue for the budget period.

?
 Sales Budget
The sales budget is prepared by multiplying the expected unit
sales volume for each product by its anticipated unit selling price.
Problem: Pran-RFL, sales volume is expected to be 3,000 units in the
first quarter with 500-unit increments in each succeeding year. Based
on a sales price of $60 per unit, the sales budget for the year by
quarters is shown below:
Pran RFL Company
Sales Budget
For the Year Ending December 31, 2017

Quarter
1 2 3 4 Year
Expected unit sales 3,000 3,500 4,000 4,500 15,000
Unit selling price x $60 x $60 x $60 x $60 x $60
Total sales $180,000 $210,000 $240,000 $270,000 $900,000

Illustration 6-3
 Production Budget
• The production budget shows the units that must
be produced to meet anticipated sales.
• A realistic estimate of ending inventory is
essential in scheduling production requirements.
• The production requirements formula is:

Desired Beginning
Required
Budgeted Ending Finished
Finished
Production
Sales Units Goods
Goods Units Units
Units

Illustration 6-4
 Production Budget
• Pran-RFL believes it can meet future sales requirements by
maintaining an ending inventory equal to 20% of the next quarter’s
budgeted sales volume.
• For example, the ending finished goods inventory for the first quarter
is 700 units (20% x anticipated second-quarter sales of 3,500 units).
• The production budget is shown on the next slide.
 Production Budget
Pran RFL Company
Production Budget
For the Year Ending December 31, 2017

Quarter
1 2 3 4 Year
Expected unit sales (sales budget) 3,000 3,500 4,000 4,500
Add: Desired ending FG unitsa 700 800 900 1,000b
Total required units 3,700 4,300 4,900 5,500
Less: Beginning FG units 600c 700 800 900
Required production units 3,100 3,600 4,100 4,600 15,400

a
20% of next quarter’s sales
b
Expected 2000 first-quarter sales, 5000 units x 20%
c
20% of estimated first-quarter 2017 sales units

Illustration 6-5
 Direct Materials Budget
• The direct materials budget contains both the
quantity and cost of direct materials to be
purchased.
• It is derived from the direct materials units
required for production (per production budget)
plus the desired ending direct materials units less
the beginning direct materials units.

Direct Required
Desired Beginning
Materials Direct
Ending Direct Direct
Units Materials
Materials Materials
Required for Purchases
Units Units
Production Units

Illustration 6-6
 Direct Materials Budget
• Because of its close proximity to its suppliers, Pran-RFL has found
that an ending inventory of raw materials equal to 10% of the next
quarter’s production is sufficient.
• The manufacture of each Kitchen-mate requires 2 pounds of raw
materials and the expected cost per pound is $4.
• The direct materials budget is shown on the next slide.
 Direct Materials Budget
Pran RFL Company
Direct Materials Budget
For the Year Ending December 31, 2017
Quarter
1 2 3 4 Year

Units to be produced (from 3,100 3,600 4,100 4,600

production budget) x 2 x 2 x 2 x 2
Direct materials per unit 6,200 7,200 8,200 9,200
Total pounds needed for production 720 820 920 1,020b
Add: Desired ending DM 6,920 8,020 9,120 10,220
Total materials required 620c 720 820 920
Direct materials purchases 6,300 7,300 8,300 9,300
Cost per pound x $4 x $4 x $4 x $4
Total cost of DM purchases $25,200 $29,200 $33,200 $37,200 $124,800
a
10% of next quarter’s production
b
Estimated 2000 first-quarter pounds needed for production, 10,200 x 10%
c
10% of estimated first-quarter 2017 pounds needed for production
Illustration 6-7
 Direct Labor Budget
The direct labor budget contains the quantities (hours) and cost
of direct labor necessary to meet production requirements.
• At Pran-RFL, two hours of direct labor are required to produce each
unit of finished goods, and the anticipated hourly wage rate is $10.
The direct labor budget is shown below:
Pran RFL Company
Direct Labor Budget
For the Year Ending December 31, 2017
Quarter
1 2 3 4 Year
Units to be produced (from
production budget) 3,100 3,600 4,100 4,600
Direct labor time per unit x 2 x 2 x 2 x 2
Total required direct labor hours 6,200 7,200 8,200 9,200
Direct labor cost per hour x $10 x $10 x $10 x $10
Total direct labor cost $62,000 $72,000 $82,000 $92,000 $308,000

Illustration 6-8
 Manufacturing Overhead Budget
• The manufacturing overhead budget on the next slide
shows the expected manufacturing overhead costs for the
budget period.
• This budget distinguishes between fixed and variable
overhead costs.
• The fixed cost amounts are assumed, and Pran-RFL expects
the following variable costs per direct labor hour:
• indirect materials: $1.00
• indirect labor: $1.40
• utilities: $0.40
• maintenance: $0.20
 Manufacturing Overhead Budget
Pran RFL Company
Manufacturing Budget
For the Year Ending December 31, 2017
Quarter
1 2 3 4 Year
Variable Costs $ 6,200 $ 7,200 $ 8,200 $ 9,200
Indirect materials 8,680 10,080 11,480 12,880
Indirect labor 2,480 2,880 3,280 3,680
Utilities 1,240 1,440 1,640 1,840
Maintenance 18,600 21,600 24,600 27,600
Total variable
Fixed costs 20,000 20,000 20,000 20,000
Supervisory salaries 3,800 3,800 3,800 3,800
Depreciation 9,000 9,000 9,000 9,000
Property tax and insurance 5,700 5,700 5,700 5,700
Maintenance 38,500 38,500 38,500 38,500
Total manufacturing overhead $57,100 $60,100 $63,100 $66,100 $246,400
Direct Labor hours 6,200 7,200 8,200 9,200 30,800
Manufacturing overhead rate per direct labor hour ($246,400  30,000) $ 8.00
Illustration 6-9
Selling & Administrative Budget
• The selling and administrative expense budget on
the next slide is a projection of anticipated operating
expenses.
• This budget also distinguishes between fixed and
variable costs.
• Once again, the fixed cost amounts are assumed, and
Pran-RFL expects the following variable costs per
unit sold (from sales budget):
• sales commissions: $3.00
• freight-out: $1.00
Selling & Administrative Budget
Pran RFL Company
Selling & Administrative Budget
For the Year Ending December 31, 2017

Quarter
1 2 3 4 Year
Variable Costs
Sales commissions $ 9,000 $ 10,500 $ 12,000 $ 13,500
Freight-out 3,000 3,500 4,000 4,500
Total variable 12,000 14,000 16,000 18,000
Fixed costs
Advertising 5,000 5,000 5,000 5,000
Sales salaries 15,000 15,000 15,000 15,000
Depreciation 7,500 7,500 7,500 7,500
Property taxes and insurance 1,000 1,000 1,000 1,000
Total fixed 1,500 1,500 1,500 1,500
30,000 30,000 30,000 30,000
Total selling and administrative
$42,000 $44,000 $46,000 $48,000 $180,000
expenses

Illustration 6-10
Budgeted Income Statement
• The budgeted income statement is the important end-
product in preparing operating budgets.
• This budget indicates the expected profitability of
operations and it provides a basis for evaluating company
performance.
• Pran RFL’s budgeted income statement is prepared with
data from all of the detailed operating budgets and the
following additional information:
• Interest expense is expected to be $100.
• Income tax expense is expected to be $12,000.
Budgeted Income Statement
Pran RFL Company
Budgeted Income Statement
For the Year Ending December 31, 2017

Sales $900,000
Cost of goods sold (15,000 x $44) 660,000
Gross profit 240,000
Selling & administrative expenses 180,000
Income from operations 60,000
Interest expense 100
Income before income taxes 59,900
Income tax expense 12,000
Net income $ 47,900
Budgeting in Service Enterprises
In service enterprises, such as a public accounting
firm, a law office, or a medical practice, the critical
factor in budgeting is coordinating professional
staff needs with anticipated services.
 Service Enterprises
If a firm is overstaffed: If an enterprise is
• Labor costs will be understaffed:
disproportionately high. • Revenue may be lost
• Profits will be lower because existing and
because of the prospective client needs for
additional salaries. service cannot be met, and
• Staff turnover will • Professional staff may seek
increase because of other positions because of
lack of challenging
work.
excessive work loads.
Budgeting in Not-for-Profit Organizations
• Budgeting is just as important for not-for-
profit organizations as for profit-oriented
enterprises.
• In most cases, not-for-profit entities budget
on the basis of cash flows (expenditures
and receipts), rather than on a revenue and
expense basis.
• The starting point in the budgeting process
is usually expenditures, not receipts.