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Budgeting - 1

BUDGETING
Sales
Inventory
projections
needs

Business
trends
New
competition
Budgeting - 2

What is a budget?

A formalized plan describing the


use and source of financial and
operating resources over a given
time period
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PURPOSES OF BUDGETING

Forces management planning


Motivation
Evaluation and control
Communication
Coordination
Education
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FEATURES OF A SOUND
BUDGETARY SYSTEM

Participative budgeting
Frequent feedback on performance
Realistic standards
Controllability
Flexible budgeting
Multiple measures of performance
Monetary and nonmonetary incentives
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The
Budgeting
Process
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Strategic
Plan

Monitoring of
Long-Term Actual
Objectives Activity

Short-Term
Objectives

Comparison of
Short-Term Actual &
Plan Planned

Budgets Investigation

Corrective
Feedback
Action
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The MASTER BUDGET is a


collection of various types of
budgets

Sales
Production
Purchases (Direct materials)
Labor
Manufacturing overhead
Administrative
Cash
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Master
Budget
Outputs
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OPERATING BUDGETS

Sales plan
Production plan
Materials purchasing plan
Labor hiring and training plan
Capital spending plan
Administrative and discretionary
spending plan
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Sales Budget
The sales budget represents
the expected quantity
of each type of product/service
to be sold multiplied by
its expected selling price.
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Generic budget format

Amount needed for current


requirements
+ Amount desired for future needs
= Total needs
- What is already on hand
= Amount to be acquired
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Production
Note the sales
budget figure will
be the starting
point for

Predicted sales quantity this budget.

+ Desired ending inventory


Total needed units
- Amount already on hand (beginning
inventory)
Units to be produced
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Direct Materials (Purchasing)

This budget is for planning the acquisition of


raw materials to support the organizations
production needs identified in the production
budget.

Units to be produced
x Raw material required per unit produced
Total raw material needed for production
+ Desired ending inventory
= Total raw material needed
- Inventory on hand
= Raw materials to be acquired
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CAPITAL BUDGET

Purpose is to plan for the


acquisition of land, buildings, and
capital equipment for expansion
and/or replacement.
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FINANCIAL BUDGETS

Master Budget usually presented in


three forms:
A statement of expected cash flows
The projected balance sheet
The projected income statement
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FLEXIBLE vs. STATIC BUDGETS

Flexible budgets - those that vary with


the activity level in the firm

Static budgets - those that do not


change with changes in activity levels

The use of the budget data


determines which type of
budget is most appropriate
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BUDGETING APPROACHES

Incremental budgeting
A budgeting approach that assumes the starting
point for each budget item is the amount spent on it
in the previous budget
The new budget is seen as last years +/- a specified
increment
Less costly but may not be strategically sound

Zero-based budgeting
A budgeting approach that assumes the starting
point for each budget item is zero
Essential feature is a review of the necessity of each
expenditure element/activity as part of the
budgeting process
More costly but more strategically sound
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Behavioral
Aspects of
Budgeting
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DESIGNING THE BUDGET PROCESS

How should budgets be


determined?
Who should be involved in the
budgeting process?
At what level of difficulty should the
budget be set to have the greatest
positive influence on peoples
motivation and performance?
Budgeting - 20

Top management wants our


budget figures for the month.
What should we tell them?

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