First Lecture Budgets

Chapter one
Introduction to Budgeting Processes
The budget—For planning and control
A budget is a detailed quantitative plan for acquiring and using

financial and other resources over a specified coming time period.
The act of preparing a budget is called budgeting.
The use of budgets to control an organization’s activities is known as

budgetary control.
Difference Between Planning and Control
Planning – involves developing objectives and preparing

various budgets to achieve those objectives.
Control – involves the steps taken by management to

increase the likelihood that the objectives set down while
planning are attained and that all parts of the organization are
working together toward that goal.
What is the advantages and disadvantages of budgeting?
- Budgeting helps you plan ahead of time.
- It gives an understanding of the expenses that are necessary and
unnecessary.
- It gives you a control over your money and gives awareness about what
happens with the money.
- It helps us organize savings and spending.
. Some disadvantages include that it can be time-consuming, difficult to
stick to, and may not work for everyone.
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Imposed Budget versus Participatory (Self-Imposed Budget)
Imposed Budget imposed from the top management without

considering the opinions and feelings of the personnel affected. Such a
dictatorial process may result in resistance to the budget. Employees may
believe that the performance evaluation method is unfair or that the goals
are unrealistic and unattainable.
Problems encountered with such imposed budgets have led

accountants and management to adopt participatory budgeting.
Participatory budgeting means that all levels of management

responsible for actual performance actively participate in setting
operating goals for the coming period. Managers and other employees are
more likely to understand and accept goals when they are involved in
formulating them.
Although many companies have used participatory budgeting

successfully, it does not always work.
Whether or not participation works depends on management’s

leadership style, the attitudes of employees, and the organization’s size
and structure.
Participation is not the answer to all the problems of budget

preparation. However, it is one way to achieve better results in
organizations that are receptive to the philosophy of participation.
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Types of budgeting methods
There are 4 types of budgeting methods:
1- Incremental - Incremental budgeting takes last year’s actual
figures and adds or subtracts a percentage to obtain the current
year’s budget. It is the most common method of budgeting
because it is simple and easy to understand. Incremental budgeting
is appropriate to use if the primary cost drivers do not change from
year to year
2- Activity based - Activity-based budgeting is a top-down budgeting
approach that determines the amount of inputs required to support
the targets or outputs set by the company. For example, a company
sets an output target of $100 million in revenues. The company
will need to first determine the activities that need to be undertaken
to meet the sales target, and then find out the costs of carrying out
these activities.
3- Value proposition - Value proposition budgeting is about making
sure that everything that is included in the budget delivers value for
the business. Value proposition budgeting aims to avoid
unnecessary expenditures
4- Zero based - Zero-based budgeting (ZBB) is a budgeting
technique that allocates funding based on efficiency and necessity
rather than on budget history. Management starts from scratch and
develops a budget that only includes operations and expenses
essential to running the business; there are no expenses that are
automatically added to the budget.
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RATIONAL BUDGET
EXERCISE 1
What is a budgeting
your own words?
- Budgeting is a way to
estimate the profits and
losses in a firm for the
future upcoming period.
How do you budget your
personal expenses?
- I budget my personal
expense by analyzing
my source of income
and the basic expenses
necessary. I then set an
amount for savings from
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the remaining amount
and the money that is
left after deducting the
savings and basic
expenses I have amount
left for my personal
expense.
What is the advantages
of budgeting?
- Budgeting helps you
plan ahead of time.
- It gives you an
understanding of the
expenses that are
necessary and
unnecessary.
- It gives you a control
over your money and
5
gives awareness about
what happens with the
money.
- It helps us organize
savings and spending.
- Makes you decide in
advance how the money
is going to work for you.
Describe an example of
the budgeting method
you use to budget your
personal expenses. If
you don’t
have one, create one
and start using it
- There are 4 types of
budgeting methods:
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Incremental -
Incremental budgeting
takes last year’s actual
figures and adds or
subtracts a
percentage to obtain the
current year’s budget. It
is the most common
method of budgeting
because it is simple and
easy to understand.
Incremental budgeting is
appropriate to use if the
primary cost drivers do
not change from year to
year
Activity based - Activity-
based budgeting is a
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top-down budgeting
approach that
determines the
amount of inputs
required to support the
targets or outputs set by
the company. For
example, a
company sets an output
target of $100 million in
revenues. The company
will need to first
determine the activities
that need to be
undertaken to meet the
sales target, and then
find out
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the costs of carrying out
these activities.
Value proposition - Value
proposition budgeting is
really a mindset about
making sure that
everything that is
included in the budget
delivers value for the
business. Value
proposition
budgeting aims to avoid
unnecessary
expenditures
Zero based - Zero-based
budgeting (ZBB) is a
budgeting technique
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that allocates funding
based
on efficiency and
necessity rather than on
budget history.
Management starts from
scratch and
develops a budget that
only includes operations
and expenses essential
to running the business;
there are no expenses
that are automatically
added to the budget.
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The ten schedules in the master budget are designed to answer
ten questions:
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1. How much sales revenue will we earn?
2. How much cash will we collect from customers?
3. How much raw material will we need to purchase?
4. How much manufacturing costs will we incur?
5. How much cash will we pay to our suppliers and our direct
laborers, and how much cash will we pay for manufacturing
overhead resources?
6. What is the total cost that will be transferred from finished
goods inventory to cost of goods sold?
7. How much selling and administrative expense will we incur
and how much cash will be pay related to those expenses?
8. How much money will we borrow from or repay to lenders –
including interest?
9. How much operating income will we earn?
10. What will our balance sheet look like at the end of the
budget period?
The budget is classified broadly into two categories:
1. Operating budget; summarize the level of activities such as sales,
purchasing, and production.
The Operating Budget consists of:
• Sales budget
• Production budget
• Direct materials budget
• Direct labor budget
• Factory overhead budget
• Selling and administrative expense budget
• Income statement
2. Financial budget; such as balance sheets, income statements, and
cash flow statements, identify the expected financial consequences
of the activities summarized in the operating budgets
The Financial Budget consists of:
• Cash budget
• Balance sheet
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Chapter one

Introduction to Budgeting Processes

The budget—For planning and control

A budget is a detailed quantitative plan for acquiring and using

The act of preparing a budget is called budgeting.

The use of budgets to control an organization’s activities is known as

Difference Between Planning and Control

Planning – involves developing objectives and preparing

Control – involves the steps taken by management to

Imposed Budget imposed from the top management without

Problems encountered with such imposed budgets have led

Participatory budgeting means that all levels of management

Although many companies have used participatory budgeting

Whether or not participation works depends on management’s

Participation is not the answer to all the problems of budget

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