Week 9/10 - Budgeting Flashcards
A budget is
a plan of action expressed in quantitative terms for a specified period
an aid to coordinating what needs to be done to implement that plan
A budget can cover
both financial and non financial aspects of the plan (e.g. a sales budget for next year can be both in revenue and number of units)
Benefits of budgeting
- Compels planning (forecasted sales, managers can begin to plan for this expected sales)
- Provides a framework for judging performance
- Motivates managers and employees
- Promotes coordination and communication
Types of Budgets
- Cash
- Sales
- Material
- Production
- Master (full set of budgets usually summarized by a cash budget and forecast income statement and balance sheet)
Cash Budget
- one of the most common types of budget to be constructed by a business
- looks at the cash inflows into the business (usually from sales) and cash outflows out of the business
- Future cash receipts and payments are estimated in order to predict the bank balance of an organization at defined intervals
- the purpose is to eliminate management to make forward planning decisions
- a cash budget is produced on a cash basis, an income statement is produced on an accrual basis
Cash flow forecasting allows you to
- see if the business will generate sufficient cash
- decide whether or not additional funds are required
- decide upon the timing of inflows and outflows
Production Budget (units)
- will be expressed in terms of the number of units that the business expects to manufacture over forthcoming periods
- set once the level of budgeted sales ahs been set
- once expected sales are budgeted for, the business can then make plans and budget for the necessary amount of materials needed for production as well as ensuring that it has the workforce needed for production
Production Budget (units) =
Sales in units
+ Budgeted closing stock (finished goods)
- Opening stock (finished goods)
Production Budget impacts
- materials purchase budget
- direct labor budget
- manufacturing overhead budget
Materials Purchase Budget (kgs) =
Production requirement/ Usage (production quantity x quantity of raw material required)
+ Budgeted closing stock (raw materials)
- Opening stock (raw materials)
= Purchase Requirements
Purchase Requirements/Usage:
the production quantity of each product (calculated in the production budget) multiplied by the quantity of each raw material required
Order of Budget Preparation
- Prepare Sales Budget (units and revenues)
- Prepare the Production Budget (units)
(Sales Budget + Closing Inventory - Opening Inventory) - Prepare the Direct Materials Usage Budget and Direct Materials Purchase Budget
- Prepare the Direct Labor Budget
- Prepare the Manufacturing Overhead Budget
- Prepare the Ending Inventories Budget
- Prepare the Cost of Goods Sold Budget
- Prepare the Non manufacturing Costs Budget
- Prepare the Budgeted Profit and Loss A/C
- Prepare the Capital Expenditure Budget
- Prepare the Cash Budget
- Prepare th Budgeted Balance Sheet
Behavioral Aspects of Budgeting
- Over-emphasis on short-term financial results
- Non-financial aspects may be overlooked
- ‘spend it or we will lose it’
- Budget padding (building in slack)
- Participative vs imposed budgeting
- Innovation may be shelved or postponed due to omission from the budget
- If bonuses are at stake, sales managers may: sell to marginal customers; cut prices too deeply; overload distributors with goods and take them back later
