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    Budgeting: Dr. Anis Suriati Binti Ahmad Department of Accounting & Finance Faculty of Management & Economics

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    Chewan Noni
    This document provides an overview of budgeting and the budgeting process. It defines a budget and explains its key purposes, such as planning, coordination, communication, motivation and control. It describes the different types of budgets based on time, function and flexibility. The budgeting process and key factors are outlined. The document explains how to prepare key components of the master budget, including sales, production, purchases, labor, overhead, cash budgets and budgeted financial statements. It also distinguishes between budgets and forecasts.

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    Budgeting: Dr. Anis Suriati Binti Ahmad Department of Accounting & Finance Faculty of Management & Economics

    Uploaded by

    Chewan Noni
    54 views28 pages
    This document provides an overview of budgeting and the budgeting process. It defines a budget and explains its key purposes, such as planning, coordination, communication, motivation and control. It describes the different types of budgets based on time, function and flexibility. The budgeting process and key factors are outlined. The document explains how to prepare key components of the master budget, including sales, production, purchases, labor, overhead, cash budgets and budgeted financial statements. It also distinguishes between budgets and forecasts.

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    management accounting chapter 1

    Original Title

    201609201209041 - Budget

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    This document provides an overview of budgeting and the budgeting process. It defines a budget and explains its key purposes, such as planning, coordination, communication, motivation and control. It describes the different types of budgets based on time, function and flexibility. The budgeting process and key factors are outlined. The document explains how to prepare key components of the master budget, including sales, production, purchases, labor, overhead, cash budgets and budgeted financial statements. It also distinguishes between budgets and forecasts.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    54 views28 pages

    Budgeting: Dr. Anis Suriati Binti Ahmad Department of Accounting & Finance Faculty of Management & Economics

    Uploaded by

    Chewan Noni
    This document provides an overview of budgeting and the budgeting process. It defines a budget and explains its key purposes, such as planning, coordination, communication, motivation and control. It describes the different types of budgets based on time, function and flexibility. The budgeting process and key factors are outlined. The document explains how to prepare key components of the master budget, including sales, production, purchases, labor, overhead, cash budgets and budgeted financial statements. It also distinguishes between budgets and forecasts.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 28

    BUDGETING

    Dr. Anis Suriati binti Ahmad


    Department of Accounting & Finance
    Faculty of Management & Economics

    Learning Outcomes:

    Define budget and purpose of budget.


    Describe budgeting process and key budget factor.
    Explain differences between budgeting and forecasting.
    Prepare budgets.
    Explain techniques of budgeting.
    Explain budgeting problems and issues.
    Human aspects of budgeting.

    Budgeting and Purpose of Budget


    Budget is defined as;
    the quantitative expression of a proposed plan of action by
    management for a specified period and an aid to coordinate
    what needs to be done to implement that plan.
    (Horngren et al., 2012: 206)
    A budget is prepared to have effective
    utilisation of resources and for the realisation
    of objectives, as efficiently as possible.

    Budgeting is a process of preparing budget.

    Budgeting and Purpose of Budget


    Budgets serve a number of purpose which are central to an organisations success.
    1.Planning
    2.Co-ordination
    3.Communication
    4.Motivation
    5.Control
    6.Evaluation

    Types of Budget
    Budgets can be classified on the
    basis of time, function and flexibility.
    Classification on the basis of time:
    Prepared to coincide with the financial year compare actual performance with
    budgeted estimates to facilitate better interpretation and understanding.
    1.Long-Term Budgets

    2. Short-Term Budgets

    Types of Budget
    Budgets can be classified on the
    basis of time, function and flexibility.
    Classification on the basis of function:
    1.Functional budget prepared on the basis of different functions
    performed in the organisation.
    2.Master budget a summary budget, which incorporates all
    functional budgets, in a summarised form.

    Types of Budget
    Budgets can be classified on the
    basis of time, function and flexibility.
    Classification on the basis of flexibility (or capacity):
    1.Fixed budget designed to remains unchanged, irrespective of the
    change in volume or level of activity.
    2.Flexible budget designed to change, in relation to change in level of
    activity. It recognises the difference between fixed, semi-fixed and variable
    cost.

    Budgeting Process and Key Budget Factor


    The budgeting process begins with a strategic planning by
    a budget committee that supervises the budgeting
    process.
    A budget committee then applies the agreed strategic
    direction to a series of plans that roll up into a master
    budget.

    The main objectives of budget committee


    is to agree on all departmental budgets,
    normal standard hours and allocations.

    Budgeting Process and Key Budget Factor


    When budgets are prepared, there are key budget factor
    (also known as principal budget factor, limiting factor or
    governing factor) which limits the quantity that can be made
    or sold.
    Examples of key budget factors are:
    a)Material: shortage of supply especially scarce material
    b)Labour: shortage of skilled labour
    c)Plant: plant capacity that is limited to machine time
    d)Working Capital: credit control
    e)Sales: customer demand

    Budgeting vs Forecasting
    Forecasts and budgets refer to the anticipated actions and
    events. But there are differences between budgets and forecasts
    as given below:
    Budgets
    Related to planned events.

    Forecasts
    Concerned with anticipated or probable
    events.

    Planned or prepared for a shorter period. May cover for longer period or years.
    A target fixed for a period.

    Only a tentative estimate.

    Result of planning is budgeting.

    Results in planning.

    Budget is prepared for the business as a Usually covers a specific business


    whole.

    function.

    Purpose of budget is not merely a Does not act as a tool of controlling


    planning device but also a controlling measurement.
    tool.

    Preparation of Budgets:
    Master Budget

    Master Budget
    two major components: operational budget and financial
    budget.
    operating budget shows the income-generating
    activities of a company, including revenues and
    expenses. The result is a budgeted income statement.
    financial budget shows the inflows and outflows of cash
    and other elements of the company's financial position.
    The inflows and outflows of cash come from the cash
    budget.

    Master Budget
    Operating Budget:
    Sales Budget
    Production Budget
    Purchases Budget
    Labour Budget
    Overhead Budget

    Master Budget
    Financial Budget:
    Cash Budget shows cash inflows and outflows,
    expected borrowing and expected investing
    Budgeted Income Statement
    Budgeted Statement of Financial Position gives the
    ending balances of the asset, liability and equity
    accounts

    Sales Budget
    the basic component of budget and influences other
    components of functional budget.
    prepared based on the following basis:
    Product
    Area
    Type of consumers
    Salesmen
    Period

    Production Budget
    shows planned production (in units) that must be made by a
    manufacturer during a specific period to meet the expected
    demand for sales and the planned finished goods inventory.
    The required production is determined by:
    Planned Production (units)
    = Expected Sales + Planned Ending Inventory Beginning Inventory

    prepared after the sales budget


    only a manufacturing business needs to prepare the
    production budget.

    Purchases Budget
    shows budgeted beginning and ending direct material
    inventory, the quantity of direct material that will be used
    in production, the amount of direct material that must be
    purchased and its cost during a specific period.
    the formula:
    Budgeted Direct Material Purchases (units):
    = Direct Material needed for Production + Budgeted Ending Direct
    Material Budgeted Beginning Direct Material

    Direct Material needed for Production (units)


    = Budgeted production during the period x units of
    direct material required per unit

    Labour Budget
    used to plan labour force requirements.
    shows the total direct labour cost and number of direct
    labour hours needed for production.
    done after the production budget.
    Direct Labour Budget
    = Budgeted Direct Labour Hours Required Cost per Direct Labour Hours

    Budgeted Direct Labour Hours Required


    = Planned Production in unit Direct Labour Hours
    Required per Unit

    Overhead Budget
    consists of planned operating expenses other than
    manufacturing costs.
    prepare before the preparation of budgeted income
    statement.
    a) Production overhead budget
    shows all the planned manufacturing costs which are
    needed to produce the budgeted production level of a
    period (other than direct costs).
    production overhead costs are separated into fixed and
    variable overhead costs for control purposes.

    Overhead Budget
    b) Selling and distribution budget
    shows the planned costs associated with selling and
    distribution of the quantities stated in the sales budget.
    example include advertising, packaging and drivers
    wages.
    Both selling and distribution expenses may be fixed
    or variable. For example sales commission and freight
    cost on sales are variable selling expenses, whereas
    sales salaries are fixed selling expenses.

    Overhead Budget
    c) Administrative overhead budget
    o separated into fixed and variable overhead costs for
    control purposes.
    o E.g., depreciation and rent on office building are fixed
    administrative expenses, whereas office supplies and
    utilities expenses are variable administrative expenses.

    Cash Budget
    o represents the anticipated receipts and payment of cash
    during the budget period.
    o it is important to anticipate cash required to meet current
    cash obligations. If at any time, a concern fails to meet
    its obligations, it will be technically insolvent.

    Cash Budget (Illustration)


    A company is expecting to have RM25,000 cash in hand on 1st October 2016 and it
    requires you to prepare an estimate of cash position in respect of three months from
    October to December 2016, from the information given below:

    Month

    Sales

    Purchases

    Wages

    Expenses

    August

    70,000

    40,000

    8,000

    6,000

    September

    80,000

    50,000

    8,000

    7,000

    October
    92,000
    52,000
    9,000
    7,000
    Additional Information:
    November
    100,000
    60,000
    10,000
    8,000
    a)Period of credit allowed by suppliers two months.
    December
    55,000
    12,000for credit sale 9,000
    b)25% of sale is for cash120,000
    and the period of credit
    allowed to customer
    one
    month.
    c)Delay in payment of wages and expenses one month.
    d)Income Tax RM25,000 is to be paid in December 2016.

    Cash Budget (Illustration)


    Particulars

    Cash Budget for the months of October December 2016


    April
    May
    June

    Opening balance for cash


    Cash receipts:
    Cash sales
    Accounts receivable

    Cash payments:
    Accounts payable
    Wages
    Expenses
    Income Tax

    Closing balance

    Total

    Budgeted Income Statement


    o contains all of the items found in a normal income
    statement, except that it is a projection of what the
    income statement will look like during future budget
    periods.
    o is prepared after other parts of the budget are prepared.

    Budgeted Statement of Financial


    Position
    o contains all of the items found in a normal statement of
    financial position, except that it is a projection of what the
    statement will look like during future budget periods.
    o Current Asset and Current Liabilities Section of the
    Statement of Financial Position:

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