2. What is a budget?
What is budgeting?
What is budgetary control?
Types of budgets.
Whose responsibility is budgeting
and budgetary control?
3. Objectives
To understand the process of budget
preparation, monitoring and control
To understand and identify the
information needed to prepare, monitor
and control budgets effectively
To identify the action that should be taken
to keep budgets under control
To identify important issues and common
problems with budgets
4. A Budget is . . .
--- a monetary or quantitative
expression of business plans and
policies in the future period of time.
A detailed plan for acquiring and
using financial and other resources
over a specified time period.
A quantitative expression of a plan of
action.
5. A Budget is . . .
A quantitative statement, for a
defined period of time, which may
include planned revenues, expenses,
assets, liabilities, and cash flows.
A budget provides a focus for the
organisation, aids the coordination of
activities, and facilitates control.’
(CIMA:2002)
6. Budgeting….
--- is preparing budgets and other
procedure for planning,
coordination and control of business
enterprise.
It involves a detailed study of
business environment clearly
grasping the management objectives,
available resources and capacity of
the enterprise.
7. Features of Budgeting
1.Financial statements with or
without monetary data.
2.Prepared for a particular period
and also prepared in advance.
3.Detailed plan.
4.Function: to attain a specific
objective
8. Characteristics of a budget
A good budget is characterised by the following:
Participation: involve as many people as possible
in drawing up a budget.
Comprehensiveness: embrace the whole
organisation.
Standards: base it on established standards of
performance.
Flexibility: allow for changing circumstances.
Feedback: constantly monitor performance.
Analysis of costs and revenues: this can be done
on the basis of product lines, departments or cost
centres.
10. Why is Budgeting Important to the
Entity?
• A comprehensive planning process is vital
due to the scope and diversity of operations
conducted in higher education.
• Budgeting improves decision making by
delegating spending authority and
providing accountability.
• Budgeting allows management to monitor
where the organization is by tracking and
evaluating spending decisions.
11. Problems in budgeting
Budgets can be seen as pressure devices
imposed by management, thus
resulting in:
bad labour relations
inaccurate record-keeping.
Departmental conflict arises due to:
disputes over resource allocation
departments blaming each other if
targets are not attained.
12. Problems in budgeting
It is difficult to reconcile personal/individual and
corporate goals.
Waste may arise as managers adopt the view,
"we had better spend it or we will lose it". This is
often coupled with "empire building" in order to
enhance the prestige of a department.
Responsibility versus controlling, i.e. some costs
are under the influence of more than one
person, e.g. power costs.
Managers may overestimate costs so that they
will not be blamed in the future should they
overspend.
15. Preparation of Budgets
Determine the Key factor
Making forecasts
Evaluation of alternative combination
of factors
Preparation of various financial
budgets
Most important are : Cash and Master
Budget
Preparation of Master Budget
16. Classification of Budget
Classification according to time
1. Long-term budgets
2. Short-term budgets
3. Current budgets
Classification based on functions
1. Functional/Subsidiary budgets
2. Master budget
Classification on the basis of flexibility
1. Fixed budget
2. Flexible budget
18. Short-Run Vs. Long-Run Budgets
Strategic Planning
• Selecting overall objectives.
• Choosing what markets to be in.
• Selecting what products to produce.
• Determining the price/quality mix.
• Deciding which technologies to use.
19. Strategic Planning
Long-run Budgets (more than one year)
Forecasts of large asset acquisitions.
Financing plans.
Research and development plans.
Short-Run Vs. Long-Run Budgets
21. Budget Formats
A. Sales Budget
B. Production Budget
C. Direct Materials Budget
D. Direct Labor Budget
E. Overhead Budget
F. Cash Receipts and Disbursements
Budget
22. Master Budgets
A comprehensive one, prepared for
the entire organization
All functional budgets are integrated.
An overall plan for the guidance of
the management
P and L A/C + Balance Sheet
Helps in coordinating activities of
various functional departments.
23. Master Budgets
Procedure
1. Preparation of sales budget – determines the
scope of operations of a firm
2. Preparation of production budget – helps in
estimating the material required , labour hours
and machine hours necessary for production.
3. Cost of production budget – elements of cost of
production – helps in estimating the cash
requirements
4. Preparation of cash budget – estimates the cash
required for payments and different sources of
funds to be mobilized.
25. The Master Budget
Sales Budget
Production
Budget
DL Budget
Cash Budget
Pro Forma
Bal. Sht
EI Budget
DM Budget
Pro Forma
Inc. Stmt
Overhead
Budget
Sales
Forecast
Capital
Budget
Pro Forma
SCF
S&A Exp
Budget
35. Budget control cycle
BUDGETARY CONTROL
SET
BUDGET
TAKE ACTION MEASURE ACTUAL
PERFORMANCE
INVESTIGATE
VARIANCES
COMPARE
ACTUAL WITH
BUDGET
36. Why budgeting and budgetary
control
Compels management to think about the
future, which is probably the most
important feature of a budgetary planning
and control system.
Promotes coordination and communication.
Clearly defines areas of responsibility -
requires managers of budget centres to be
made responsible for the achievement of
budget targets for the operations under
their personal control.
37. Why budgeting and budgetary control
Provides a basis for performance appraisal
(variance analysis). A budget is basically a
yardstick against which actual performance is
measured and assessed. Control is provided by
comparisons of actual results against budget plan.
Departures from budget can then be investigated
and the reasons for the differences can be divided
into controllable and non-controllable factors.
Enables remedial action to be taken as variances
emerge.
Motivates employees by participating in the
setting of budgets.
38. Why Budgetary Control
Aiming maximization of Profits
Effective coordination
Evaluation of Executive Performance ( on the basis of
goals set for each department)
Clear cut goals and targets
Economy in operations
Correction of Performance continuously
Introduction of Incentive schemes of remuneration
Shutting down of unprofitable products and activities
Improves the allocation of scarce resources.
39. Why Budgetary Control
Helps anticipate and prepare for changing
conditions
Coordinates activities of various departments
Increases production efficiency, eliminates waste
and controls cost
Aims at maximization of profits through careful
planning.
Provides a yardstick against which actual results
are compared
Shows management where remedial action is
required Pinpoints efficiency or lack of it
40. Limitations of Budgetary Control
Whilst budgets may be an essential part of any
marketing activity they do have a number of
disadvantages, particularly in perception terms.
Prediction of uncertain future
Changes of conditions
Complacence
Difficulty in coordination
Conflict among different departments
42. On the basis of Time and Function
TIME
Long term Budget : They are prepared by top
management to reflect the long-term planning for special
activities like capital expenditure, R&D etc
Short term Budget : Budgets generally for a duration of 1
yr and expressed in monetary terms.
Current Budget: Duration – 1 month and are prepared
for current operations of the business
FUNCTION
Functional Budget : Budgets that relate to various
functions of the concern - Purchase budget , Cash budget ,
Production budget etc
Master Budget : Summary of various functional budgets
– it encompasses activities of the whole organization.
43. On the basis of Flexibility
Fixed Budget : prepared for a given level of activity and
remains same irrespective of change in activity.
Flexible Budget : prepared for a various levels of activity
– fixed , variable and semi-variable.
Other important Budgets :
Sales Budget : shows quantity of finished products to be
sold and the price at which they are sold.
Production Budget : it is based on sales budget and it
shows the budgeted quantity of output to be produced
during a specific period.
Material and Labour Budget
Overhead Budget – Production , Administration , Selling
and Distribution and R&D.
44. When budgeting carefully consider the
following
Top management support
All management levels must be aware of the budget’s
importance to the company and must know that the
budget has top management’s support.
Top management, then, must clearly state long-range
goals and broad objectives.
These goals and objectives must be communicated
throughout the organization.
Long-range goals include the expected quality of
products or services, growth rates in sales and
earnings, and percentage-of-market targets.
Overemphasis on the mechanics of the budgeting
process should be avoided.
45. When budgeting carefully consider the
following
Participation in goal setting
Management uses budgets to show how it intends
to acquire and use resources to achieve the
company’s long-range goals.
Employees are more likely to strive toward
organizational goals if they participate in setting
them and in preparing budgets.
Often, employees have significant information that
could help in preparing a meaningful budget.
Also, employees may be motivated to perform their
own functions within budget constraints if they are
committed to achieving organizational goals.
46. When budgeting carefully consider the
following
Communicating results
People should be promptly and clearly
informed of their progress.
Effective communication implies (1)
timeliness, (2) reasonable accuracy, and (3)
improved understanding.
Managers should effectively communicate
results so employees can make any
necessary adjustments in their performance.
47. When budgeting carefully consider the
following
Flexibility
If significant basic assumptions
underlying the budget change during the
year, the planned operating budget should
be restated.
For control purposes, after the actual level
of operations is known, the actual revenues
and expenses can be compared to expected
performance at that level of operations.
48. When budgeting carefully consider
the following
Follow-up
Budget follow-up and data feedback are part
of the control aspect of budgetary control.
Since the budgets are dealing with projections
and estimates for future operating results and
financial positions, managers must
continuously check their budgets and correct
them if necessary.
Often management uses performance reports
as a follow-up tool to compare actual results
with budgeted results.
53. Best Time to Use . . .
In start-up organizations
In extremely small businesses
In times of economic crises
When operating managers lack
budgetary skills or perspective.
54. Advantages . . .
Requires less time.
Utilize top management’s
knowledge of overall resource
availability.
Increase probability that the firm’s
strategic plans are incorporated.
55. Disadvantages . . .
Reduce feeling of teamwork.
Dissatisfaction and low morale.
Limited acceptance of stated goals
and objectives.
May stifle initiative of lower level
managers.
57. Best Time to Use . . .
In well-established organizations.
In extremely large businesses.
In times of economic affluence.
When operating managers have
strong budgetary skills and
perspectives.
58. Advantages . . .
Obtain information from those persons
most familiar with the needs and
constraints of the organizational units.
Leads to better morale and higher
motivation.
Integrates knowledge that is diffused
among various levels of management.
59. Advantages . . .
Provides a means to develop fiscal
responsibility and budgetary skills of
employees.
Develop a high degree of acceptance
of and commitment to organizational
goals and objectives by operating
management.
Are generally more realistic.
60. Disadvantages . . .
Require significantly more time.
May motivate managers to
introduce “slack” into the budget.
May support “empire building” by
subordinates.
61. Discussion
Conflicts in organisations are often a result
budgeting and budgetary control.
Comment.
Imposed budgets stand better chances of
success in a volatile environment.
Demonstrate from a strategic point of view
ways to make them successful and solutions
to any challenges that may be faced.
Planning is equal to budgeting. Validate this
equation.
Editor's Notes
#51:Participatory Budgets:
Neither end of this continuum is quite desirable. Simply commenting on the handed down budget still reflects an imposed budgeting system, while each individual manager setting his or her own budget disregards the fact that cooperation and communication among areas is essential to the functioning of a cohesive organization.
