Budgeting - 1

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BUDGETING
Sales projections
Inventory needs
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Business trends
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New competition
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What is a budget?

• A formalized plan describing the use and source
  of financial and operating resources over a given
  time period

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PURPOSES OF BUDGETING

• Forces management planning
• Motivation
• Evaluation and control
• Communication
• Coordination
• Education

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FEATURES OF A SOUNDBUDGETARY SYSTEM

• Participative budgeting
• Frequent feedback on performance
• Realistic standards
• Controllability
• Flexible budgeting
• Multiple measures of performance
• Monetary and nonmonetary incentives

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The Budgeting Process
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Strategic Plan
Monitoring of Actual Activity
Long-Term Objectives
Short-Term Objectives
Comparison of Actual Planned
Short-Term Plan
Budgets
Investigation
Feedback
Corrective Action
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The MASTER BUDGET is a collection of various
types of budgets

• Sales
• Production
• Purchases (Direct materials)
• Labor
• Manufacturing overhead
• Administrative
• Cash

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Master Budget Outputs
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OPERATING BUDGETS

• Sales plan
• Production plan
• Materials purchasing plan
• Labor hiring and training plan
• Capital spending plan
• Administrative and discretionary spending plan

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Generic budget format

• Amount needed for current requirements
• Amount desired for future needs
• Total needs
• - What is already on hand
• Amount to be acquired

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Production
Note the sales budget figure will be the
starting point for this budget.

• Predicted sales quantity
• Desired ending inventory
• Total needed units
• - Amount already on hand (beginning inventory)
• Units to be produced

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Direct Materials (Purchasing)

• This budget is for planning the acquisition of
  raw materials to support the organizations
  production needs identified in the production
  budget.

• Units to be produced
• x Raw material required per unit produced
• Total raw material needed for production
• Desired ending inventory
• Total raw material needed
• - Inventory on hand
• Raw materials to be acquired

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CAPITAL BUDGET

• Purpose is to plan for the acquisition of land,
  buildings, and capital equipment for expansion
  and/or replacement.

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FINANCIAL BUDGETS

• Master Budget usually presented in three forms
• A statement of expected cash flows
• The projected balance sheet
• The projected income statement

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FLEXIBLE vs. STATIC BUDGETS

• Flexible budgets - those that vary with the
  activity level in the firm
• Static budgets - those that do not change with
  changes in activity levels
• The use of the budget data determines which type
  of budget is most appropriate

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BUDGETING APPROACHES

• Incremental budgeting
• A budgeting approach that assumes the starting
  point for each budget item is the amount spent on
  it in the previous budget
• The new budget is seen as last years /- a
  specified increment
• Less costly but may not be strategically sound
• Zero-based budgeting
• A budgeting approach that assumes the starting
  point for each budget item is zero
• Essential feature is a review of the necessity of
  each expenditure element/activity as part of the
  budgeting process
• More costly but more strategically sound

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Behavioral Aspects of Budgeting
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DESIGNING THE BUDGET PROCESS

• How should budgets be determined?
• Who should be involved in the budgeting process?
• At what level of difficulty should the budget be
  set to have the greatest positive influence on
  peoples motivation and performance?

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Top management wants our budget figures for the
month. What should we tell them?