Paper F2, Management Accounting Lecture by: Mr.

Farrukh Abbas

1-Page | 7
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
BUDGETING

Planning:

It is a process of formulating strategy to be followed in future for the achievement of objectives.

Budget:

It is a short term plan expressed in monitory terms.

Budgeting Process:

Step 1: Formation of Budget Committee:

Budget committee is a group of individuals from different areas of an organization.

Step 2: Preparation of Budget Manual:

In this process the manual of Budget is prepared.

Step 3: Identification of Principle Budget Factor:

It is also known as Limiting factor. In this it is assumed that Sales Demand is the only limited Facor.

Step 4: Preparation of Sales Budget:

This budget is prepared and expressed in 2 forms.

1. Sales Budget in Units

This figure is mentioned in question.

2. Sales Budget in Revenue

Sales Budget in Units x Budgeted Selling Price

Step 5: Production Budget:

This budget tells us the no. of units to be produced.

Case 1: No inventory of Finished Goods

Production Budget in Units = Sales Budget in Units

Case 2: Inventory of Finished Goods

Production Budget in Units = Sales Budget in units + Increase in Stock of Finished Goods
Or
Production Budget in Units = Sales Budget in units - Decrease in Stock of Finished Goods

Step 6: Material Budget:

This budget in prepared and expressed in 4 forms.
Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 7
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com

1. Material Usage Budget:

This budget tells us the quantity of Raw material that will be used in production.

Case 1:

Input = kgs, litres, tones
Output = Units

Material Usage Budget = Production Budget in Units x Standard Material Usage/Unit

Case 2:

Input = kgs, litres, tones
Output = kgs, litres, tones
With No Loss of Material

Material Usage Budget = Production Budget

Case 3:

Input = kgs, litres, tones
Output = kgs, litres, tones
With Loss of Material

Material Usage Budget =





Standard Yield =

%


Yield in %age =

x 100

Input xx
Less: Loss (xx)

Output xx


2. Material Purchase Budget:

This budget tells us the quantity of Material to be purchased.

Case 1: No Stock of Raw Material

Purchase Budget = Usage Budget




Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

3-Page | 7
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
Case 2: Stock of Raw Material Held

Purchase Budget = Usage Budget + Increase of Raw Material
Or
Purchase Budget = Usage Budget - Decrease of Raw Material

3. Usage Cost Budget:

Usage Cost Budget = Material Usage Budget x Purchase Price

4. Purchase Cost Budget:

Purchase Cost Budget = Material Purchase Budget x Purchase Price

Step 7: Labor Budget:

This budget is prepared and expressed in 2 forms.

1. Labor Hours Budget:

This budget tells us the no. of hours that labor will have to work to complete the production.

Labors hours Budget = Production Budget in Units x Standard Hours/Unit

2. Labor Cost Budget:

Labor Cost Budget = labor Hours x Rate/hour

Step 8: Overhead Budget:

Overhead Budget = OAR x Budgeted Activity Level

Step 9: Discretionary Budget:

These budgets depend upon the discretion of management e.g., Training of Employees, Marketing and
Advertisement, Research and Development etc.

Step 10: Approval of Budgets:

Every Manager approves their departments budget.

Step 11: Co-ordination of Budgets:

All the budgets are then coordinated together.

Step 12: Final Approval of Budgets by Budget Committee:

The budget committee approves all the budgets.





Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

4-Page | 7
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
Step 13: Preparation of Master Budget:

Income Statement
Balance Sheet
Cash Flow Statement

Step 14: Implementation of Budgets:

All the budgets are then implemented.

Step 15: Feedback:

Comparison is done against the Plan, Budgeted and Achieved and the feedback is given.