Budgeting - 1

BUDGETING
Sales
projections

Business
trends

Inventory
needs

?
?

?
?

New
competition

Budgeting - 2

What is a budget?
A formalized plan describing
the use and source of financial
and operating resources over a
given time period

Budgeting - 3

PURPOSES OF BUDGETING
Forces management planning
Motivation
Evaluation and control
Communication
Coordination
Education

Budgeting - 4

FEATURES OF A SOUND
BUDGETARY SYSTEM

Participative budgeting
Frequent feedback on performance
Realistic standards
Controllability
Flexible budgeting
Multiple measures of performance
Monetary and nonmonetary
incentives

Budgeting - 5

The
Budgeting
Process

Budgeting - 6
Strategic
Plan

Long-Term
Objectives

Monitoring of
Actual
Activity

Short-Term
Objectives

Short-Term
Plan

Comparison of
Actual &
Planned

Budgets

Investigation

Feedback

Corrective
Action

Budgeting - 7

The MASTER BUDGET is a

collection of various types of
budgets

Sales
Production
Purchases (Direct materials)
Labor
Manufacturing overhead
Administrative
Cash

Budgeting - 8

Master
Budget
Outputs

Budgeting - 9

OPERATING BUDGETS

Sales plan
Production plan
Materials purchasing plan
Labor hiring and training plan
Capital spending plan
Administrative and
discretionary spending plan

Budgeting - 10

Sales Budget
The sales budget represents
the expected quantity
of each type of product/service
to be sold multiplied by
its expected selling price.

Budgeting - 11

Generic budget format

Amount needed for current

requirements
+ Amount desired for future
needs
= Total needs
- What is already on hand
= Amount to be acquired

Budgeting - 12

Production

Predicted sales quantity

+ Desired ending inventory
Total needed units
- Amount already on hand
(beginning inventory)
Units to be produced

Note the sales

budget figure will
be the starting
point for
this budget.

Budgeting - 13

Direct Materials (Purchasing)

This budget is for planning the

acquisition of raw materials to support the
organizations production needs identified in
the production budget.
Units to be produced
x Raw material required per unit produced
Total raw material needed for production
+ Desired ending inventory
= Total raw material needed
- Inventory on hand
= Raw materials to be acquired

Budgeting - 14

CAPITAL BUDGET

Purpose is to plan for the

acquisition of land, buildings,
and capital equipment for
expansion and/or replacement.

Budgeting - 15

FINANCIAL BUDGETS
Master Budget usually
presented in three forms:
A statement of expected cash
flows
The projected balance sheet
The projected income statement

Budgeting - 16

FLEXIBLE vs. STATIC BUDGETS

Flexible budgets - those that vary with
the activity level in the firm
Static budgets - those that do not
change with changes in activity levels

The use of the budget data

determines which type of
budget is most appropriate

Budgeting - 17

BUDGETING APPROACHES
Incremental budgeting
A budgeting approach that assumes the starting point for
each budget item is the amount spent on it in the previous
budget
The new budget is seen as last years +/- a specified
increment
Less costly but may not be strategically sound

Zero-based budgeting
A budgeting approach that assumes the starting point for
each budget item is zero
Essential feature is a review of the necessity of each
expenditure element/activity as part of the budgeting
process
More costly but more strategically sound

Budgeting - 18

Behavioral
Aspects of
Budgeting

Budgeting - 19

DESIGNING THE BUDGET

PROCESS

How should budgets be

determined?

Who should be involved in the

budgeting process?

At what level of difficulty should

the budget be set to have the
greatest positive influence on
peoples motivation and
performance?

Budgeting - 20

Top management wants our

budget figures for the month.
What should we tell them?