Session 1 Budget Development Environment
Objectives of budgeting
Establishing specific goals
Being able to compare actual results with goals
Executing plans to achieve goals
Affects the managerial functions of: Planning, Directing, Controlling
A budgetary unit of a company is called a responsibility center.
Planning: involves setting goals to guide decisions and help motivate employees
Controlling: involves comparing actual performance against the budgeted goals
Directing: involves decisions and actions to achieve budgeted goals.
Sometimes budgeting can affect human behaviour
When set too tight, which are very hard or impossible to achieve.
When set too loose, which are very easy to achieve.
When budgeted goals conflict with the objectives of the company and employees
Attainable goals are more likely to motivate employees and managers.
Budgetary slack: Managers may plan slack in their budgets to provide a “cushion” for unexpected events
May cause inefficiency by reducing the budgetary incentive to trim spending.
Budgeting Systems: For control purposes, annual budgets are usually subdivided into shorter time periods, such as quarters of the year, months, or weeks.
Continuous budgeting: maintains a 12- month projection into the future.
The 12-month budget is continually revised by replacing the data for the month just ended with the budget data for the same month in the next year.
The budget committee consists of the budget director, the controller, the treasurer, the production manager, and the sales manager.
Zero-based budgeting, requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.
Static budget shows the expected results of a responsibility center for only one activity level.
they do not adjust for changes in activity levels.
Flexible budgets show the expected results of a responsibility center for several activity levels.
Because the flexible budget adjusts for changes in the level of activity, it is much more accurate and useful than the static budget.
Master budgets includes operating budgets and financial budget.
Financial Budgets
Operating budgets
Cost of goods budgeting states how much is being taken into account to produce a certain product.
The direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production.
The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.
The sales budget begins by estimating the quantity of sales. The prior year’s sales are often used as a starting point.
The direct materials purchases budget estimates the quantities of direct materials to be purchased to support budgeted production and desired inventory levels.
The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production
Budgeted Income Statement
This budget summarizes the budgeted operating activities of the company.
The cash budget estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time.
The primary source of estimated cash receipts is from cash sales and collections on account.
Estimated cash payments must be budgeted for operating costs and expenses such as manufacturing costs, selling expenses, and administrative expenses.
In addition, estimated cash payments may be planned for long-term debt payments.
The capital expenditures budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete
A budgeted balance sheet is similar to a balance sheet, except the amounts used are estimated.
All of this characteristics influence one way or another the cashflows
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