Budgets• Estimates of the income and expenditure of a business or a part of a business over a time period• Used extensively in planning• Helps establish efficient use of resources• Help monitor cash flow and identify departures from plans• Maintains a focus and discipline for those involved
Budgets• Flexible Budgets – budgets that take account of changing business conditions• Operating Budgets – based on the daily operations of a business• Objectives Based Budgets - Budgets driven by objectives set by the firm• Capital Budgets – Plans of the relationship between capital spending and liquidity (cash) in the business.
Static budget• The fixed budget , often called a static budget, is not subject to change or alteration during the budget period. A company "fixes" budgets in at least two circumstances:• The cost of a budgeted activity shows little or no change when the volume of production fluctuates within an expected range of values. For example, a 10 percent increase in production has little or no impact on administrative expenses.• The volume of production remains steady or follows a tight, pre-set schedule during the budget period. A company may fix its production volume in response to an all inclusive contract; or, it may produce stock goods.
Dynamic budget• The variable or flexible budget is called a dynamic budget. It is an effective evaluative tool for a company that frequently experiences variations in sales volume which strongly affect the level of production. In these circumstances a company initially constructs a series of budgets for a range of production volumes which it can reasonably and profitably meet.
• The combination budget recognizes that most production activities combine both fixed and variable budgets within its master budget. For example, an increase in the volume of sales may have no impact on sales expenses while it will increase production costs.
• The continuous budget adds a new period (month) to the budget as the current period comes to a close. Under the fiscal year approach, the budget year becomes shorter as the year progresses. However, the continuous method forces managers to review and assess the budget estimates for a never-ending 12-month cycle.
Operating budgets• The operating budget gathers the projected results of the operating decisions made by a company to exploit available business opportunities. In the final analysis, the operating budget presents a projected (pro forma) income statement which displays how much money the company expects to make.• This net income demonstrates the degree to which management is able to respond to the market in supplying the right product at an attractive price, with a profit to the company.
MASTER BUDGET• The master budget aggregates all business activities into one comprehensive plan. It is not a single document, but the compilation of many interrelated budgets which together summarize an organizations business activities for the coming year. * The operating budget and the financial budget are the two main components of a companys master budget.
THE SALES FORECAST AND BUDGET• The sales budget predicts the number of units a company expects to sell. From this information, a company determines how many units it must produce.
THE ENDING INVENTORY BUDGET• The ending inventory budget presents the Rupee value and the number of units a company wishes to have in inventory at the end of the period. From this budget, a company computes its cost of goods sold for the budgeted income statement.
• THE PRODUCTION BUDGET After it budgets sales, a company examines how many units it has on hand and how many it wants at year- end. From this it calculates the number of units needed to be produced during the upcoming period.
• THE DIRECT-LABOR BUDGET Once a company has determined the number of units of production, it calculates the number of direct- labor hours needed. A company states this budget in the number of units and the total costs.• A company may sort and display labor-hours using parameters such as: the type of operation, the types of employees used, and the cost centers involved.
• THE DIRECT-MATERIALS BUDGET With the estimated level of production in hand, the company constructs a direct-materials budget to determine the amount of additional materials needed to meet the projected production levels.
THE CAPITAL EXPENDITURE BUDGET• A company engages in capital budgeting to identify, evaluate, plan, and finance major investment projects through which it converts cash (short-term assets) into longterm assets. A company uses these new assets, such as computers, robotics, and modern production facilities, to improve productivity, increase market share, and bolster profits
• THE PRODUCTION OVERHEAD BUDGET A company generally includes all costs, other than materials and direct labor, in the production overhead budget. Because of the diverse and complex nature of business, production overhead contains numerous items.
• BUDGET OF COST OF GOODS SOLD At this point the company has projected the number of units it expects to sell and has calculated all the costs associated with the production of those units. The company will sell some units from the preceding periods inventory, others will be goods previously in process, and the remainder will be produced.
• ADMINISTRATIVE EXPENSE BUDGET In the administrative expense budget the company presents how much it expects to spend in support of the production and sales efforts.• The major expenses accounted for in the administrative budget are: officers salaries; office salaries; employee benefits for administrative employees; payroll taxes for administrative employees; office supplies and other office expenses supporting administration; losses from uncollectible accounts; research and development costs; mortgage payments
BUDGETED INCOME STATEMENT• A budgeted income statement combines all the preceding budgets to show expected revenues and expenses.• To arrive at the net income for the period, the company includes estimates of sales returns and allowances, interest income, bond interest expense, the required provision for income taxes, and a number of nonoperating income and expenses, such as dividends received, interest earned, nonoperating property rental income, and other such items.
FINANCIAL BUDGET• The financial budget contains projections for cash and other balance sheet items—assets and liabilities. It also includes the capital expenditure budget. It presents a companys plans for financing its operating and capital investment activities.
THE CASH BUDGET• In the cash budget a company estimates all expected cash flows for the budget period by stating the cash available at the beginning of the period, adding cash from sales and other earned income to arrive at the total cash available, and then subtracting the projected disbursements for payables, prepayments, interest and notes payable, income tax, etc.
THE BUDGETED BALANCE SHEET• The budgeted balance sheet is a statement of the assets and liabilities the company expects to have at the end of the period. The budgeted balance sheet is more than a collection of residual balances resulting from the foregoing budget estimates. (Since a company prepares the budgeted balance sheet before the end of the current period, it uses an estimated beginning balance sheet.)
BUDGETED STATEMENT OF CASH FLOWS• This statement anticipates the timing of the flow of cash revenues into the business from all resources, and the outflow of cash in the form of payables, interest expense, tax liabilities, dividends, capital expenditures, and the like.
Budgets• Variance – the difference between planned values and actual values – Positive variance – actual figures less than planned – Negative variance – actual figures above planned