1. Budgeting for
Planning and Control

2. Budget
• Budgets are the quantitative expressions of
plans that identify an organization’s objectives
and the actions needed to achieve them.
• Budgets can be used to compare actual
outcomes with planned outcomes.
• A budget might be a forecast, a means of
allocating resources, a standard or a target.

3. Budget
• A budget is a 'quantitative expression of a plan
for a defined period of time.
• It may include
– planned sales volumes and revenues;
– resource quantities,
– costs and expenses;
– assets, liabilities and cash flows

4. Control
• It is the process of setting standards, receiving
feedback on actual performance, and taking
corrective action.
• Control is best achieved by comparison of the
actual results with the original plan.
• Appropriate action can then be taken to correct
any deviations from the plan.
• The comparison of actual results with a
budgetary plan, and the taking of action to
correct deviations, is known as feedback control.

5. Budgets may help in …
• Authorising expenditure
• Communicating objectives and plans
• Controlling operations
• Co-ordinating activities
• Evaluating performance
• Planning and rewarding performance

6. The purposes of budgeting
• They act as authorities to spend, that is, they
give authority to budget managers to incur
expenditure in their part of the organisation;
• They act as comparators for current
performance, by providing a yardstick against
which current activities can be monitored.
– These two roles are combined in a system of
budgetary planning and control.

7. Essentials of Budget
• It is prepared for a definite future period.
• It is a statement prepared prior to a defined period of
time.
• The Budget is monetary and/or quantitative statement
of policy.
• The Budget is a predetermined statement and its
purpose is to attain a given objective.
• A budget, therefore, be taken as a document which is
closely related to both the managerial as well as
accounting functions of an organization.

8. Differences between Forecasting and
Budgets

9. Steps in the preparation of a budget
• The first task in the budgetary process is to
identify the principal budget factor.
• This is also known as the key budget factor or
limiting budget factor.
• The principal budget factor is the factor which
limits the activities of an organisation.
– For example, if sales volume is the principal budget factor, then
the sales budget must be prepared first, based on the available
sales forecasts. All other budgets should then be linked to this.
Contd …

10. • In the second step the budget team needs to
concentrate on the order of budget
preparation.
• Assuming that the principal budget factor has
been identified as being sales, the stages
involved in the preparation of a budget can be
summarised as follows…
Steps in the preparation of a budget
Contd …

11. Steps in the Preparation of a Budget
– The sales budget is prepared in units of product
and sales value. This budget decides the planned
increase or decrease in finished goods inventory
levels.
– With the information from the sales and inventory
budgets, the production budget can be prepared.
The production budget will be stated in terms of
units.
– This leads on logically to budgeting the resources
for production. This involves preparing a
materials usage budget, machine usage budget
and a labour budget.

12. • During the preparation of the sales and production
budgets, the managers of the cost centres of the
organisation will prepare their draft budgets for the
department overhead costs.
• Such overheads will include
maintenance, stores, administration, selling and
research and development.
• From the above information a budgeted income
statement can be produced.
Steps in the Preparation of a Budget

13. • In addition several other budgets must be
prepared in order to arrive at the budgeted
statement of financial position.
• These are the capital expenditure budget (for
non-current assets), the working capital
budget (for budgeted increases or decreases
in the level of receivables and accounts
payable as well as inventories), and a cash
budget.
Steps in the Preparation of a Budget

14. Types of plans

15. Strategic Planning
– It is concerned with preparing long-term action
plans to attain the organisation’s objectives.
– It is also known as corporate planning or long-
range planning.

16. Budgetary Planning
– It is concerned with preparing the short- to
medium-term plans of the organisation.
– It will be carried out within the framework of the
strategic plan.
– An organisation’s annual budget could be seen as
an interim step towards achieving the long-term
or strategic plan.

17. Operational Planning
– It refers to the short-term or day-to-day planning
process.
– It is concerned with planning the utilisation of
resources and will be carried out within the
framework set by the budgetary plan.
– Each stage in the operational planning process can
be seen as an interim step towards achieving the
budget for the period.
– Operational planning is also known as tactical
planning.

18. Types of Budgets

19. On the basis of Time
• Long-Term Budgets
– These are prepared for a longer period varies
between five to ten years.
• Short-Term Budgets
– These budgets are usually prepared for a period of
one year.
• Current Budgets
– Current budget is a budget which is established for
use over a short period of time and related to
current conditions

20. According to Function
• Functional or Subsidiary Budgets
– Sales Budget
– Purchase Budget
– Production Budget
– Selling and Distribution Cost Budget
– Labour Cost Budget
– Cash Budget
– Capital Expenditure Budget
• Master Budgets
– Master Budget as the summary budget incorporating
its functional budgets, which is finally
approved, adopted and employed.

21. On the basis of Capacity
• Fixed Budget
– A fixed budget is designed to remain unchanged
irrespective of the level of activity actually
attained.
• Flexible Budget
– A flexible budget is a budget which is designed to
change in accordance with the various level of
activity actually attained.

22. Functional Budgets

23. Functional/departmental budget
• Functional/departmental budgets include
budgets for sales, production, purchases and
labour.
• A departmental/functional budget is a 'budget of
income and/or expenditure applicable to a
particular function frequently including sales
budget, production cost budget (based on
budgeted production, efficiency and
utilisation), purchasing budget, human resources
budget, marketing budget and research and
development budget'.

24. Sales Budget
• A sales budget is a detailed schedule showing
the expected sales for the budget period;
typically, it is expressed in both dollars and
units of production.
• An accurate sales budget is the key to the
entire budgeting in some way.

25. Production Budget
• The product budget is built up from plant
utilisation budget, which shows the extent of
utilisation of plant and machinery.
– It shows the extent of utilisation of each machine,
– If the capacity is insufficient, extra-shift working may
be required or new machinery may be purchased or a
portion of output may have to be manufactured by
outsideplants,
– If the capacity is idle, the sales department can be
alerted to find out ways and means to get additional
sales volume.

26. Labour and Manpower Budget
• This budget will show the number of each
grade of workmen required to produce the
target output which has been approved by
the budget committee.
• It will also indicate anticipated labour cost for
the budget period, and the period of training
that would be required for the additional
workmen, if required to be recruited.

27. Purchases/Materials Budget
• It will take into account the projected
inventories at the commencement of the
budget period and the inventory norms fixed
by the management and determine the
quantities and value of materials that are
needed to be purchased.

28. Cash Budget
• A cash budget is a statement in which estimated
future cash receipts and payments are tabulated
in such a way as to show the forecast cash
balance of a business at defined intervals.
• A cash budget is a 'detailed budget of estimated
cash inflows and outflows incorporating both
revenue and capital items'.
• A cash budget can give forewarning of potential
problems that could arise so that managers can
be prepared for the situation or take action to
avoid it.

30. Master budget
• The master budget is a summary of all the
functional budgets.
• It usually comprises the budgeted income
statement, budgeted balance sheet and budgeted
cash flow statement.
• The master budget provides a consolidation of all
the subsidiary budgets and normally consists of a
budgeted income statement, budgeted statement
of financial position, and a cash budget.

31. Budget variances
• Control involves comparing a flexible budget
(based on the actual activity level) with actual
results.
• The differences between the flexible budget
figures and the actual results are budget
variances.

32. Capital expenditure budgets

33. Capital expenditure budgets
• Capital expenditure budgeting is the process
of establishing a financial plan for purchases
of long-term business assets.
• Because of the monetary amounts involved in
capital expenditure, the capital expenditure
budget is one of the principal subsidiary
budgets.

34. Steps in the preparation of capital
expenditure budgets
• Step 1
– An accountant or budget officer should be responsible for the capital
expenditure budget.
• Step 2
– Sales, production and related budgets cover, in general, a 12-month
period.
– A detailed capital expenditure budget should be prepared for the
budget period but additional budgets should be drawn up for both the
medium and long term.
• Step 3
– The budget covering the 12 month period should be broken down into
monthly or quarterly spending, and details incorporated into the cash
budget.

35. Steps in the preparation of capital
expenditure budgets
• Step 4
– Suitable financing must be arranged as necessary.
• Step 5
– The capital expenditure budget should take account of
the principal budget factor.
– If available funds are limiting the organisation's activities
then they will more than likely limit capital expenditure.

36. Steps in the preparation of capital
expenditure budgets
• Step 6
– As part of the overall budget coordination
process, the capital expenditure budget must be
reviewed in relation to the other budgets.
• Step 7
– The capital expenditure budget should be updated
on a regular basis since both the timing and amount
of expenditure can change at short notice.

37. Example of a capital expenditure
budget

38. Depreciation
• Any depreciation on budgeted capital
expenditure will need to be incorporated into
the budgeted income statement, along with
depreciation on existing non-current assets.
• The depreciation on planned disposals of non-
current assets also needs to be taken into
consideration.

39. Example of a capital expenditure
budget

40. Example: budgeted depreciation
• Suppose, for simplicity, XYZ Company (whose capital
expenditure budget is shown above) applies a 10% straight-
line depreciation policy to all non-current assets.
• All non-current assets are under ten years old. Non-current
assets had a cost value of $4,000,000 at the beginning of
20X4.
• Budgeted additions to non-current assets are shown above.
• The plant being replaced by project LV46 has a cost value of
$200,000, and will be disposed of at the very end of
September (the new plant becoming operational on 1
October 20X4).

41. Solution
• The budgeted depreciation charge for the year is:
Depreciation on non-current assets held at 1
January 20X4 ($4,000,000 × 10%)
400,000
Less: depreciation not charged on disposals (3/12 ×
10% × $200,000)
(5,000)
Plus: depreciation on additions
LV45 (9/12 × 10% × $100,000) 7,500
LV46 (3/12 × 10% × $500,000) 12,500
Budgeted depreciation charge for 20X4 4,15,000

42. Approaches to Budgeting

43. Incremental Budgeting
–The traditional approach to budgeting is to
base next year's budget on the current
year's results plus an extra amount for
estimated growth or inflation next year.
–This approach is known as incremental
budgeting since it is concerned mainly with
the increments in costs and revenues which
will occur in the coming period.

44. Zero-based budgeting
• It involves preparing a budget for each cost
centre from a zero base.
• Every item of expenditure has then to be
justified in its entirety in order to be included
in the next year's budget.

45. Rolling Budgets
• A rolling budget is a budget which is
continuously updated by adding a
further accounting period (a month or
quarter) when the earlier accounting
period has expired.

46. Participative budgeting
• It is ‘a budgeting system in which all budget
holders are given the opportunity to
participate in setting their own budgets'.