What is a Budget ?A budget is a financial plan of future costs and revenues for a specific period in the future.
What are the purposes of Budgeting ? To compare budgeted costs with actual costs at the same level of activity To help in controlling costs To plan product levels To compare like with like
Operating /Subsidiary BudgetsSales Budget = Budgeted Unit sales X Budgeted Selling PriceProduction Budget = Budgeted Sales + Budgeted Closing Stock – Budgeted Opening StockMaterial Usage Budget = Production Units X Units of Different Materials Required per ProductMaterials Purchase Budget = Materials Usage Budget + Closing Stock of Materials – Opening Stock of Materials
Principal Budgets Cash Budget*prepared on weekly/monthly basis to allow management deal with shortages or surpluses.*show the opening cash position + inflows – outflows = closing cash
Cash Budget• Only actual receipts and payments are included• Only when actually received and paid, not due• Depreciation is always excluded• Credit sales and purchases at the end of the period are excluded• Changes in stock level will affect cash budgets• The closing balance at the end of the period one is equal to the opening balance of period two.
Principal Budgets Master Budget*Includes all subsidiary budgets*Consists of budgeted profit and loss account and budgeted balance sheet*If manufacturing firm a budgeted manufacturing account and budgeted trading account will be also prepared
Principal Budgets Flexible Budgets ( Higher Level )*adjusting the original budget to the actual level of activity so that comparisons can be made*separate costs into fixed costs and variable costs using the high low method
Exam Tips Order you Prepare Budgets sales, production, materials usage , material purchasesCan be asked in 3 parts A schedule of receipts A schedule of payments A cash budget