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    Overview of Budgeting: Unit 3 Section

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    Babamu Kalmoni Jaato
    The document provides an overview of budgeting, defining key terms like budgets, budgetary control, corporate plans, and functional budgets. It explains that budgets are quantitative statements prepared in advance to plan for revenues, expenses, and cash flows. Budgetary control involves preparing budgets and comparing actual performance to budgets to ensure plans are carried out. Corporate plans set broad long-term aims and objectives. Functional budgets include sales, production, materials, labor, and cash budgets.

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    Overview of Budgeting: Unit 3 Section

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    Babamu Kalmoni Jaato
    28 views6 pages
    The document provides an overview of budgeting, defining key terms like budgets, budgetary control, corporate plans, and functional budgets. It explains that budgets are quantitative statements prepared in advance to plan for revenues, expenses, and cash flows. Budgetary control involves preparing budgets and comparing actual performance to budgets to ensure plans are carried out. Corporate plans set broad long-term aims and objectives. Functional budgets include sales, production, materials, labor, and cash budgets.

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    The document provides an overview of budgeting, defining key terms like budgets, budgetary control, corporate plans, and functional budgets. It explains that budgets are quantitative statements prepared in advance to plan for revenues, expenses, and cash flows. Budgetary control involves preparing budgets and comparing actual performance to budgets to ensure plans are carried out. Corporate plans set broad long-term aims and objectives. Functional budgets include sales, production, materials, labor, and cash budgets.

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    © All Rights Reserved
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    28 views6 pages

    Overview of Budgeting: Unit 3 Section

    Uploaded by

    Babamu Kalmoni Jaato
    The document provides an overview of budgeting, defining key terms like budgets, budgetary control, corporate plans, and functional budgets. It explains that budgets are quantitative statements prepared in advance to plan for revenues, expenses, and cash flows. Budgetary control involves preparing budgets and comparing actual performance to budgets to ensure plans are carried out. Corporate plans set broad long-term aims and objectives. Functional budgets include sales, production, materials, labor, and cash budgets.

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    of 6

    COST AND MANAGEMENT

    UNIT 3 SECTION 1 OVERVIEW OF BUDGETING


    ACCOUNTING Unit 3, section 1: Overview of budgeting

    You are welcome to the Section I of Unit 3 of this module. Take your time
    to grasp the meaning, functions and process of budgeting and variance.
    Once again, this session seeks to provide a solid foundation upon which you
    can appreciate and build a comprehensive knowledge in planning and
    preparing a good budget for an organization. It is vitally important that
    business organization, institutions, and nations develop plans for the future
    since corporate plans and budgeting are the map and the vehicle that directs
    and transport businesses and nations to their final destinations.

    By the end of this section, you should be able to:


     define budget, budget control and indicate their relationship with
    corporate plans;
     state and explain the major terms in budgeting; and
     explain the types of budget

    Now read on…

    Definition of Budgets and Budgetary Control


    Budget is an important tool of planning and control. Planning involves
    looking systematically at the future so that decisions can be made today
    which will bring the company its desired results. Control is the process of
    measuring and correcting actual performance to ensure that plans for
    implementing the chosen course of action are carried out.

    According to the Chartered Institute of Management Accountants (CIMA) a


    budget can be defined as a quantitative statement, for a defined period of
    time, which may include planned revenues, expenses, assets, liabilities and
    cash flows. Budgets are usually prepared and approved prior to the budget
    period, and may be prepared for the business as a whole, departments or
    sections.

    Budgetary Control is a system of controlling costs through preparation of


    budgets. Budgeting, the process of preparing a budget is only a part of
    budgetary control. CIMA has defined budgetary control as “the
    establishment of budgets relating to the responsibilities of executives of a
    policy and the continuous comparison of the actual with the budgeted
    results, either to secure by individual action the objective of the policy or to
    provide a basis for its revision.”

    Definition of Corporate Plans


    Corporate plan is basically the broad aims and objectives usually codified in
    a form of mission statement. This statement is usually brief and will often
    articulate the high standards set for an organization. According to Lucey
    (2005) corporate plan can be defined as the systematic planning of the
    direction and total resources of an organization so as to achieve specific
    objectives over the medium to long term. In other words, the plan should

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    show not only the new tasks, but how existing operations will fix into the
    new targets. Thus, such corporate plan (sometimes referred to as strategic
    plan) will be used by middle/departmental managers of an organization to
    prepare operational plans, budgets and short term targets.

    Features of a good Budget


     A budget is primarily a planning device but it also serves as a basis for
    performance evaluation and control.
     A budget is prepared either in quantitative terms or in money terms or in
    both.
     A budget is prepared for a definite future period.
     A budget implements the policies formulated by management for
    attaining the given objectives.

    Basic Terminologies in budgeting and budgetary control


     Budget Period: The budget period is the time period to which the plan
    of action relates. A detailed budget for each responsibility centre is
    normally prepared for one year. The annual budget may be divided into
    quarters or months.

     Budget Manual: The procedures for preparing the budget are contained
    in the budget manual. It describes the objectives and procedures
    involved in the budgeting processes and provides a useful source of
    reference for managers responsible for budget preparation. The manual
    must state among other things:

     The Budget Committee: a budget committee is a committee formed in


    the organization to bring together the activities of all departments in a
    coordinated way and controls those activities in desirable manner. It is
    usually made up of top executives and all the functional managers. The
    functions of a budget committee include:
     Instructing departments to carry out budget preparation procedures
     discussing foreseeable problems with departmental managers
     ensuring that the budgets are prepared on schedule
     co-ordinations the budgets of different departments
     agreeing the final budgets and assembling the master budget
     issuing approved budgets to sectional managers

     The Principal Budget Officer: The committee appoints a budget


    officer whose duty is to co-ordinate the individual budgets into a master
    budget for the whole organisation.

     Master Budget: The master budget coordinates all the financial


    projection in the organisation’s individual budgets into a single budget
    for the defined financial period. Master budget embraces the impact of
    both operating decisions and financing decisions. The term master in

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    “master budget” only refers to it being a detailed, organisation wide set


    budgets.

    Functional Budgets
    A business organization seen as an entity is made up of a number of
    departments or functions. In preparing a budget for a period, all the
    departments or functional budgets are brought together and incorporated
    into one budget called the master budget. Basically we have functional
    budgets and Master budgets. Hope you can recall that functional budgets are
    coordinated to form a master budget. There are a number of functional
    budgets that are prepared. Examples are: Sales Budget, Production Budget,
    Raw Materials Budget, Purchases Budget, Labour Budget, Production
    overhead budget, Cash Budget.

     Sales Budget: It is the first to be prepared. It shows the number of


    units to be sold, unit price and value of sales planned for the budget
    period. The sales manager will be involved in the preparation of the
    sales budget and a budget is prepared for each product.

     Production Budget: It is an estimated unit of production for the budget


    period. The sales budget determines the production budget. The
    production budget shows the quantity/units of a product to be produced
    during the budget period. In its preparation it takes into account the
    sales budget while making adjustments for opening stock balances and
    planned buffer stock balances at the end of the budget period.

     Material Usage Budget: Material usage budget is based on the


    production budget. This is because the production budget determines
    the quantity of raw materials that will be needed in production. In the
    material usage budget, units of raw materials needed for the production
    of all products are specified. It also shows the types of raw materials
    needed for the production of each product.

     Material Purchases Budget: It shows the quantities and the amount of


    raw materials to be purchased for the production of each product, after
    making adjustments for opening stock of raw materials and closing
    stock of raw materials.

     Labour Budget: This is prepared to show the number of hours and the
    cost of labour needed for production. It is prepared for all grades of
    labour and includes direct and indirect labour.

     Cash Budget: The Cash budget is one of the most important and one of
    the last to be prepared. It is a detailed estimate of cash receipts from all
    sources and cash payments for all purposes and the resultant cash
    balances during the budget period. It ensures that the business has

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    sufficient cash available to meets its needs as and when they arise. It
    thus shows the projected cash receipt and cash payments.

    Preparation of Cash Budget


    Format of Cash budget.

    Cash Budget for the 4th Quarter of 2014


    October November December
    GHC GHC GHC
    Opening Balance (Bal c/d) xxx xxx xxx
    Cash Receipts:
    Cash sales xxx xxx xxx
    Receipts from debtors xxx xxx xxx
    Total Cash Available (A) xxx xxx xxx
    Cash Payments:
    Cash purchases xxx xxx xxx
    Payment to creditors xxx xxx xxx

    Wages and salaries xxx xxx xxx


    Other expenses xxx xxx xxx
    Total payments (B) xxx xxx xxx
    Closing balance (Bal b/d) (A-B) xxx xxx xxx

    Types of Budgets
    There are varieties of budgets that can be prepared for particular period
    within an organisation, to facilitate the smooth running of the organisation.
    Among the various types of budgets are:
     Fixed budget
     Flexible budget
     Incremental budget
     Rolling budget
     Zero based budget

     Fixed Budget
    Budgeting can be undertaken on a fixed or flexible basis. A fixed budget
    is a budget that remains unchanged even when the actual activity levels
    differ from the set levels. It is a budget designed to remain for a
    particular period usually one year. Managers will agree the budget for
    the year and then allow the budget to run its course regardless of the
    actual level of output attained. Although, it may be necessary to review
    and alter the budgeted costs and revenues on some occasions, fixed
    budget, in essence, is a one-off exercise during an accounting period.

     Flexible Budget
    A flexible budget is a budget designed to change in relation to the actual
    activity levels attained to allow for the behaviour of variable costs at

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    different levels of activity. A flexible budget keeps changing to reflect


    the difference between fixed, semi-variable and variable costs in relation
    to the level of activity achieved. The budgeted cost against which the
    actual costs will be compared is adjusted to the prevailing activity level.
    Flexible budgets are usually based on level of activity and after
    production, the budgeted costs are flexed to the level of operation.

    The main distinction between fixed and flexible budget is that, whereas
    fixed budget do not change even where actual production is not at parity
    with the budgeted output, flexible budget costs changes with the level of
    output.

     Rolling or Continual Budget


    A rolling budget, as the name suggests is constantly updated. Annual
    budget is normally broken down into smaller time intervals, to facilitate
    smooth planning and control of organizational operations. Under rolling
    budget, a new month is added to replace the month which has just
    elapsed thereby ensuring that at all times there will be a budget for a full
    planning period. Rolling budgets are also referred to as continual
    budgets

     Incremental Budgeting
    Traditionally, setting of budgets has tended to be on the basis of what
    has happened in the past year, with some adjustment for any changes in
    any factors which are anticipated to influence the operations of the
    ensuing financial year (for example inflation). This approach of
    preparing budget is generally referred to as incremental budgeting. It is
    often applied in situations where budget-holders or responsible
    managers for the budget, are allocated a specific lump sum of money to
    be spent in the area of activity concerned. Incremental budgets are also
    referred to as discretionary budgets

     Zero-Based Budget (ZBB)


    This is usually based on organizational policy that all spending needs to
    be justified. Hence in establishing each sectional budget (i.e. personnel
    department) each year, it is not automatically acceptable that a training
    and development must be financed in the future, on a simple premise
    that, they were undertaken this year. The training and development
    budget will start from a zero base and will only be allowed increased if a
    plausible case can be presented or defended for the expected increase.
    Top management will need to be convinced that the proposed activities
    represent value for money or such expenditure is actually worthwhile

    Exercises
    1. Explain 5 functional budgets
    2. List four features of a good budgets

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    3. Explain 5 types of budgets


    4.
    The following information relate to the budget of Dwomo Ltd for the
    Second Quarter of 2014. The balance on hand as at 1 April, 2014 was
    GHC150,000. The sales budget is as follows:
    GHC’000
    March 460
    April 360
    May 360
    June 400

    Analysis of records indicates that customers settle according to the


    following pattern: 50% within the month of sale and 50% the following
    month.
    Extracts from the purchases budget were as follows:
    GHC’000
    March 300
    April 280
    May 230
    June 280

    The payments to creditors are analysed as follows:


    70% in the month of purchase and 30% in the month following the month of
    purchase.
    Wages and salaries are GHC180,000 per month. Rent of GHC5,000 is to be
    paid every month.
    Insurance premium of GHC15,000 is to be paid in June. Fixed assets will
    be sold for GHC8,000 in May.

    You are required to prepare the Cash budget for the second quarter of 2014.

    UEW/IEDE 91

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