Budgeting

BUDGETING –

- What is a budget?

o A budget is a plan of action expressed in quantitative terms for a specified period.

- What does a budget help with?

o A budget helps aid to coordinate what needs to be done to implement that plan.

- What does a budget cover?

o A budget covers both financial and non-financial aspects of the plan (sales can be in both revenue and units)

- Who uses budgets?

o Budgets are used across all kinds of organisations, (commercial and non profit)

- What are the benefits of budgeting?

o It makes you plan.
o It promotes coordination and communication.
o It motivates managers and employees.
o It aids control.
o It provides a framework for evaluating performance.

- What are features of budgetary control?

o To identify strategic objectives
o Establish budgets.
o Measure actual performance.
o Compare actual performance with the budget.
o Establish variances.
o Analyse the variances.
o Take corrective action if necessary.

- What is a cash budget?

o Future cash receipts and payments are estimated in order to predict the bank balance of an organisation at defined intervals.

- What is the purpose of a cash budget?

o The purpose is to enable management to make forward planning decisions.

- How do you calculate production budget (units)

o Sales in units + Budgeted closing stock – Opening stock \= production in units (FINISHED GOODS)

- How do you calculate the materials purchase budget (kg/litres etc)

o Production requirement / Usage + Budgeted closing stock – Opening stock \= Purchase requirements (RAW MATERIALS)

- Order of budget preparation;

1. Prepare the sales budget (units and revenues)
2. Prepare the production budget (units) (sales in units + closing inventory – opening inventory)
3. Prepare the direct materials usage budget and direct materials purchase budget
4. Prepare the direct labour budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget (opening inventory + purchases – inventory used \= closing inventory)
7. Prepare the cost of goods sold budget
8. Prepare the nonmanufacturing costs budget
9. Prepare the budgeted income statement
10. Prepare the capital expenditure budget
11. Prepare the cash budget
12. Prepare the budgeted balance sheet.

What is Operating Budgeting comprised of?

* The revenues budget
* All the various cost budgets culminating in the Budgeted Income Statement.

What is Financial Budgeting comprised of?

* The capital expenditure budget
* The cash budget
* The budgeted balance sheet

What is the Master Budget?

* All budgets combined

What are the key behavioural aspects of budgeting?

* Over-emphasis on short-term financial results
* Non-financial aspects may be overlooked
* Spend it or we lose it

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What is a fixed budget?

* Actual results compared with original budget

What is a flexible budget?

* Actual results compared with a budget amended to take account of the actual level of activity.

Issues with traditional budgeting?

* Time consuming
* Short term
* Focus on financial measures
* Soon out-of-date
* Negative impact on entrepreneurship

What are modern budgeting approaches? (zero based)

* Beyond budgeting
* Zero based budgeting
* Encourages a more questioning approach
* Costly to implement
* May make employees feel threatened

What are modern budgeting approaches (activity based)

* Activity based budgeting
* budgets prepared according to cost-driving activity
* aims to authorise only the supply of those resources that are needed to perform activities to meet budgeted production and sales volumes
* more accurate budgets
* closer links between costs and management responsibilities