This document provides an overview of budgets, budgeting processes, and budget types. It discusses that a budget quantitatively expresses plans to achieve objectives and allows for comparison of actual vs planned outcomes. The budgeting process involves identifying limiting factors, preparing functional budgets in a logical order, aggregating into a master budget, and comparing actuals to flexed budgets to identify variances. Different types of budgets include long-term/short-term, fixed/flexible, functional like sales/production, and the master budget. Budgets play roles in planning, control, communication, and motivation.

1. Budgeting for
Planning and Control

2. Budget
• Budget is a quantitative expressions of
plans that identify an organization’s
objectives and the actions needed to
achieve them.
• Budgets can be used to compare actual
outcomes with planned outcomes.
• A budget might be a forecast, a means
of allocating resources, a standard or a
target.

3. Budget
• A budget is a 'quantitative expression
of a plan for a defined period of time.’
• It may include
– planned sales volumes and revenues;
– resource quantities,
– costs and expenses;
– assets, liabilities and cash flows

4. Control
• It is the process of setting standards,
receiving feedback on actual
performance, and taking corrective
action.
• Control is best achieved by
comparison of the actual results with
the original plan.

5. Control
• Appropriate action can then be taken
to correct any deviations from the
plan.
• The comparison of actual results with
a budgetary plan, and the taking of
action to correct deviations, is known
as feedback control.

6. Budgets may help in …
• Authorising expenditure
• Communicating objectives and plans
• Controlling operations
• Co-ordinating activities
• Evaluating performance
• Planning and rewarding performance

7. The purposes of budgeting
• They act as authorities to spend, that is,
they give authority to budget managers to
incur expenditure in their part of the
organisation;
• They act as comparators for current
performance, by providing a yardstick
against which current activities can be
monitored.
– These two roles are combined in a system of
budgetary planning and control.

8. The purposes of budgeting
• A method of planning the use of resources
• A vehicle for forecasting
• A means of controlling the activities of various
groups within the firm
• A means of motivating individuals to achieve
performance levels agreed and set.
• A means of communicating the wishes and
aspirations of senior management
• A means of resolving conflicts of interest
between groups with the organisation

9. Essentials of Budget
• It is prepared for a definite future period.
• It is a statement prepared prior to a defined
period of time.
• The Budget is monetary and/or quantitative
statement of policy.
• The Budget is a predetermined statement and its
purpose is to attain a given objective.
• A budget, therefore, be taken as a document
which is closely related to both the managerial as
well as accounting functions of an organization.

10. Preparation of Budgets

11. Planning
• The act or process of making a
plan or plans.
• Establishment of objectives,
and the formulation,
evaluation and selection of the
policies, strategies, tactics and
action required to achieve
them.

12. Types of plans
• Strategic Planning
• Budgetary Planning
• Operational Planning

13. Strategic Planning
– It is concerned with preparing long-term
action plans to attain the
organisation’s objectives.
– It is also known as corporate planning
or long-range planning.

14. Budgetary Planning
– It is concerned with preparing the short-to
medium-term plans of the
organisation.
– It will be carried out within the
framework of the strategic plan.
– An organisation’s annual budget could
be seen as an interim step towards
achieving the long-term or strategic
plan.

15. Operational Planning
– It refers to the short-term or day-to-day
planning process.
– It is concerned with planning the utilisation
of resources and will be carried out within
the framework set by the budgetary plan.
– Each stage in the operational planning
process can be seen as an interim step
towards achieving the budget for the
period.
– Operational planning is also known as
tactical planning.

16. Budget Period
• Period for which a budget is
prepared and used, which may
then be subdivided into control
periods. (may be 13 or 14 control
periods)

17. Budget Manual
• It is a collection of instructions
governing the responsibilities of
periods and the procedures, forms
and records relating to the
preparation and use of budgetary
data.
• It is likely to contain the objectives of
the budgetary process, the organisational
structure, principal budget outlines,
administrative details and procedural mattes.

18. The Responsibility for Preparing Budgets
• Sales manager should draft the sales budget and
selling overhead cost centre budgets.
• Purchase manager should draft the material
purchase budget.
• Production manager should draft the direct
production cost budgets.
• Various cost centre managers should prepare the
individual production, administration and
distribution cost centre budgets for their own cost
centre.
• The cost accountant will analyse the budgeted
overheads to determine the overhead absorption
orates for the next budget period.

19. Budget Committee
• The budget committee is assisted by
a budget officer who is usually an
accountant.
• Every part of the organisation should
be represented on the committee.
• The coordination and administration
of budgets is usually the
responsibility of a budget committee.

20. Functions of Budget Committee
• Coordination (issues of the budget manual)
• Issuing of timetables
• Allocation of responsibilities
• Communication of final budgets to
appropriate managers
• Comparison (actual with standards)
• Continuous assessment

21. Steps in the preparation of a budget
• The first task in the budgetary process is
to identify the principal budget factor.
• This is also known as the key budget
factor or limiting budget factor.
• The principal budget factor is the factor
which limits the activities of an
organisation.
– For example, if sales volume is the principal budget factor,
then the sales budget must be prepared first, based on the
available sales forecasts. All other budgets should then be
linked to this.
Contd …

22. Steps in the preparation of a budget
• In the second step the budget team
needs to concentrate on the order of
budget preparation.
• Assuming that the principal budget
factor has been identified as being
sales, the stages involved in the
preparation of a budget can be
summarised as follows…
Contd …

23. Steps in the Preparation of a Budget
– The sales budget is prepared in units of
product and sales value. This budget decides
the planned increase or decrease in finished
goods inventory levels.
– With the information from the sales and
inventory budgets, the production budget can
be prepared. The production budget will be
stated in terms of units.
– This leads on logically to budgeting the
resources for production. This involves
preparing a materials usage budget, machine
usage budget and a labour budget.

24. Steps in the Preparation of a Budget
• During the preparation of the sales and
production budgets, the managers of the cost
centres of the organisation will prepare their
draft budgets for the department overhead
costs.
• Such overheads will include maintenance,
stores, administration, selling and research
and development.
• From the above information a budgeted
income statement can be produced.

25. Steps in the Preparation of a Budget
• In addition several other budgets must be
prepared in order to arrive at the budgeted
statement of financial position.
• These are the capital expenditure budget
(for non-current assets), the working
capital budget (for budgeted increases or
decreases in the level of receivables and
accounts payable as well as inventories),
and a cash budget.

26. Why Budgets Cause Problems?
• These are time consuming and expensive
• Budgets provide poor value to users
• Budgets fail to focus on shareholder
value
• These are too rigid and prevent fast
response
• Budgets protect rather than reduce costs

27. Why Budgets Cause Problems
• Budgets stifle product and strategy
innovation
• Budgets focus on sales targets rather
than customer satisfaction
• Budgets are divorced from strategy
• Budgets reinforce a dependency
culture
• Budgets lead to unethical behavior

28. Role of Budgets
• To aid the planning of the
organisation in a systematic and
logical manner that adheres to the
long term strategy
• It determines direction
• It forecasts outcomes
• It allocates resources
• It promotes forward thinking

29. Role of Budgets
• It turns strategic objectives into
practical reality
• It establishes priorities.
• It sets targets in numerical terms
• It provides direction and co-ordination
• It communicates objectives,
opportunities and plans various
managers

30. Role of Budgets
• It assign responsibilities
• It allocates resources
• It delegates without loss of control
• It provides motivation for
managers to achieve goals
• It is motivating staff
• It improves efficiency

31. Role of Budgets
• To establish targets and standards
which employees are motivated to
achieve
• To evaluate performance against the
budget
• To provide a framework for evaluating
the performance of managers in
meeting individual and department
targets

32. Role of Budgets
• To control activities by measuring
progress against the original plan,
making adjustments where necessary
• To control income and expenditure
• To facilitates management by
exception
• To take remedial action when there is
deviation from the plan

33. Types of Budgets

34. On the basis of Time
• Long-Term Budgets
– These are prepared for a longer period varies
between five to ten years.
• Short-Term Budgets
– These budgets are usually prepared for a
period of one year.
• Current Budgets
– Current budget is a budget which is
established for use over a short period of time
and related to current conditions

35. According to Function
• Functional or Subsidiary Budgets
– Sales Budget
– Purchase Budget
– Production Budget
– Selling and Distribution Cost Budget
– Labour Cost Budget
– Cash Budget
– Capital Expenditure Budget
• Master Budgets
– Master Budget as the summary budget
incorporating its functional budgets, which is finally
approved, adopted and employed.

36. On the basis of Capacity
• Fixed Budget
– A fixed budget is designed to
remain unchanged irrespective of
the level of activity actually
attained.
• Flexible Budget
– A flexible budget is a budget which
is designed to change in accordance
with the various level of activity
actually attained.

37. Functional Budgets

38. Sales Budget
• A sales budget is a detailed schedule
showing the expected sales for the
budget period; typically, it is
expressed in both dollars and units
of production.
• An accurate sales budget is the key
to the entire budgeting in some way.

39. Production Budget
• The product budget is built up from
plant utilisation budget, which shows the
extent of utilisation of plant and machinery.
– It shows the extent of utilisation of each
machine,
– If the capacity is insufficient, extra-shift
working may be required or new machinery
may be purchased or a portion of output may
have to be manufactured by outsideplants,
– If the capacity is idle, the sales department
can be alerted to find out ways and means to
get additional sales volume.

40. Labour and Manpower Budget
• This budget will show the number of
each grade of workmen required to
produce the target output which has
been approved by the budget
committee.
• It will also indicate anticipated labour
cost for the budget period, and the
period of training that would be
required for the additional workmen, if
required to be recruited.

41. Purchases/Materials Budget
• It will take into account the projected
inventories at the commencement of
the budget period and the inventory
norms fixed by the management and
determine the quantities and value of
materials that are needed to be
purchased.

42. Cash Budget
• A cash budget is a statement in which estimated
future cash receipts and payments are tabulated
in such a way as to show the forecast cash
balance of a business at defined intervals.
• A cash budget is a 'detailed budget of estimated
cash inflows and outflows incorporating both
revenue and capital items'.
• A cash budget can give forewarning of potential
problems that could arise so that managers can
be prepared for the situation or take action to
avoid it.

44. Master budget
• The master budget is a summary of all the
functional budgets.
• It usually comprises the budgeted income
statement, budgeted balance sheet and
budgeted cashflow statement.
• The master budget provides a consolidation
of all the subsidiary budgets and normally
consists of a budgeted income statement,
budgeted statement of financial position, and
a cash budget.

45. Budget variances
• Control involves comparing a
flexible budget (based on the
actual activity level) with actual
results.
• The differences between the
flexible budget figures and the
actual results are budget
variances.

46. Approaches to Budgeting

47. Incremental Budgeting
– The traditional approach to budgeting is
to base next year's budget on the current
year's results plus an extra amount for
estimated growth or inflation next year.
– This approach is known as incremental
budgeting since it is concerned mainly
with the increments in costs and revenues
which will occur in the coming period.

48. Rolling Budgets
• A rolling budget is a budget which is
continuously updated by adding a
further accounting period (a month or
quarter) when the earlier accounting
period has expired.

49. Participative budgeting
• It is ‘a budgeting system in which all
budget holders are given the
opportunity to participate in setting
their own budgets'.

50. Zero-based budgeting
• It involves preparing a budget for each
cost centre from a zero base.
• Every item of expenditure has then to
be justified in its entirety in order to be
included in the next year's budget.