ADMINISTERING THE

“ BUDGET: REPORTS,
ANALYSES, AND
EVALUATIONS
LECTURE 3

Fathurrahman Anwar, SE., MBA

References:
”
K. Shim, Jae, Joel G. Siegel. Budgetting Basic and Beyonds. 4th Ed.
John Willey & Sons Inc.
Budget Planning

A budget is a view into the future – a financial estimate of

future business activities.

Identifying company goals is the first step in budget

preparation. Company goals might be:
 to increase sales
 reduce cost of merchandise sold
 increase net income
Budget Planning (continued)

Two budgets commonly prepared in businesses are:

 Budgeted income statement – projection of a

business’s sales, costs, expenses and net income for a
fiscal period. Often called an operating budget.

 Cash budget – projection of a business’s cash receipts

and payments for a fiscal period. Used to manage
estimated cash shortages and overages.
Budget Functions

A budget serves three important functions:

 Planning – managers make projections, plan actions
to meet goals

 Operational control – management compares actual

amounts to budgeted amounts to determine how well
a business is performing

 Department coordination – all management personnel

must help plan and use budget as a guide to manage
sales, costs, and expenses
Budget Period

 The length of time covered by a budget is usually one

year.
 Annual budget is used to compare current financial
performance with budget plans.
 Annual budget is normally prepared for a company’s
fiscal year.
Sources of Budget
Information
 Budgets are not exact since they show only projected sales, costs,
and expenses.
 Companies use many sources to prepare budgets.
 Company records – accounting and sales records from prior periods
are used to determine trends
 General economic information – changes in the national economy
affect budget decisions
 Company staff and managers – department managers project budget
items for their areas of responsibility of the business
 Good judgment – final budget decisions must be based on good
judgment
Comparative Income
Statement
 Provides an analysis of previous years’
sales, cost, and expense amounts

 Income statement containing sales, cost,

and expense information for two or more
years

 Highlights items that may be increasing

or decreasing at a higher rate than other
items on the statement
 First column shows actual sales, costs, and expenses for
the current year

 Second column shows actual amounts for the prior year

 Third column shows the amount of increase or decrease

from the prior year

 Fourth column shows the percentage by which the

current year amount increased or decreased from the
prior year amount
Interpreting the Comparative Income Statement
(continued)

 The percentage change indicates whether the change is:

 Favorable

 Unfavorable

 Normal
Favorable

•Percentage increase in
expenses or costs is less than
percentage increase in sales

•Percentage decrease in
expenses or costs is more than
percentage decrease in sales
Unfavorable

•Percentage increase in
expenses or costs is greater
than percentage increase in
sales

•Percentage decrease in
expenses or costs is less than
percentage decrease in sales
Normal

 Percentage increase in expenses

or costs is equal to percentage
increase in sales

 Percentage decrease in expenses

or costs is equal to percentage
decrease in sales
Budgeted Income
Statement
 Businesses set goals, develop operational
plans, and project sales, expenses, and costs

 Operational plans provide general guidelines

for achieving the company’s goals.

 Operational plan is converted into a more

precise plan expressed in dollars by preparing
a budgeted income statement.
Budgeted Income
Statement (continued)
 Separate schedules are prepared to assist
management in evaluating operations and
goals.
 Sales budget schedule
 Purchases budget schedule
 Selling expenses budget schedule
 Administrative expenses budget schedule
 Other revenue and expenses budget schedule

 Budgeted Income Statement shows a

company’s projected sales, costs,
expenses, and net income.
Sales Budget Schedule

 Prepared first because other budget schedules are

affected by the projected net sales

 Projected net sales are used to estimate the amount of

merchandise to purchase and the amount that may be
spent for salaries, advertising, and other selling and
administrative expenses.
Purchases Budget
Schedule
 Shows the projected amount of purchases that will be
required during a budget period

 Factors considered when planning a purchases

budget:
 Projected unit sales
 Quantity of merchandise on hand at the beginning of
the budget period
 Quantity of merchandise needed to fill projected sales
orders without having excessive inventory
 Price trends of merchandise to be purchased
Selling Expenses Budget
Schedule
 Shows projected expenditures directly related to
selling operations
 Some selling expenses are relatively stable and
require little budget planning. Example: Depreciation
Expense
 Other selling expenses increase and decrease in
relation to increases and decreases of sales.
 Most selling expenses are linked closely to net sales.
Administrative Expenses Budget Schedule

 Shows the projected expenses for all operating

expenses not directly related to selling operations
 Most administrative expenses are known and remain
the same each period.
 Sources used to prepare this budget schedule are:
 Past records
 Company plans
 Sales and selling expenses budget schedules
 Discussions with other managers
Other Revenue and Expenses Budget Schedule

 Show projections for revenue and expenses from

activities other than normal operations.

 Typical items in this budget schedule are:

 Interest income
 Interest expense
 Gains or losses on sale of plant assets
Budgeted Income
Statement
 Shows a company’s projected sales, costs, expenses,
and net income

 Prepared from the details of the five budget schedules

 Allows for budgeting of federal income tax

Cash Budgets

 Good cash management requires

planning and controlling cash so that it
will be available to meet obligations
when they come due.

 Cash budgets help analyze cash

inflows and outflows.
Cash Budgets (continued)

 Cashreceipts budget schedule reports

projected cash receipts for a budget
period.

 Projections are made from the following:

 Cash sales
 Collections on account from
customers
 Cash to be received from other
sources
Cash Budgets (continued)

 Cash payments budget schedule reports projected cash

payments for a budget period.
 Projections are made from the following:
 Cash payments for accounts payable or notes
payable to vendors
 Cash payments for each expense item (requires an
analysis of the selling expenses, administrative
expenses, and other revenue and expenses budget
schedules)
 Cash payment for buying equipment and other
assets
 Cash payments for dividends
 Cash payments for investments
Cash Budgets & Performance
Reports
 Analysis of actual cash balance is used to determine
how actual cash compares to projected cash

 If actual cash is less than projected cash,

management must determine the reason and take
action to correct.
 Decrease could be caused by customers not
paying
 Decrease could be caused by expenses
exceeding budget projections
 Ifdecrease continues, business may have to
borrow money until receipts and expenses are
brought into balance.
Performance Reports

 Compares actual amounts with the

budgeted income statement

 Shows variations between actual and

projected items

 Management reviews performance

reports to identify areas that need to
be reviewed.
Performance Reports
(continued)

 First column shows amounts projected.

 Second column shows actual sales, costs, and

expenses.

 Third column shows the difference between

actual and projected.

 Fourth column shows the percentage of the

amount increased or decreased from the
projected amount
Performance Reports
(continued)

 Management should determine

what causes unfavorable results
and how to correct those
situations.

 Management should also

determine what causes favorable
results and encourage
continuation of those actions.