3. Budgets
โข Estimates of the income and expenditure of a
business or a part of a business over a time
period
โข Used extensively in planning
โข Helps establish efficient use
of resources
โข Help monitor cash flow and identify departures
from plans
โข Maintains a focus and discipline
for those involved
4. Budgets
โข Flexible Budgets โ budgets that take account of
changing business conditions
โข Operating Budgets โ based on
the daily operations of a business
โข Objectives Based Budgets - Budgets driven by
objectives set by the firm
โข Capital Budgets โ Plans of the relationship between
capital spending and liquidity (cash) in the business.
5. Static budget
โข The fixed budget , often called a static budget, is not
subject to change or alteration during the budget
period. A company "fixes" budgets in at least two
circumstances:
โข The cost of a budgeted activity shows little or no
change when the volume of production fluctuates
within an expected range of values. For example, a 10
percent increase in production has little or no impact
on administrative expenses.
โข The volume of production remains steady or follows a
tight, pre-set schedule during the budget period. A
company may fix its production volume in response to
an all inclusive contract; or, it may produce stock
goods.
6. Dynamic budget
โข The variable or flexible budget is called a
dynamic budget. It is an effective evaluative
tool for a company that frequently
experiences variations in sales volume which
strongly affect the level of production. In
these circumstances a company initially
constructs a series of budgets for a range of
production volumes which it can reasonably
and profitably meet.
7. โข The combination budget recognizes that most
production activities combine both fixed and
variable budgets within its master budget. For
example, an increase in the volume of sales
may have no impact on sales expenses while it
will increase production costs.
8. โข The continuous budget adds a new period
(month) to the budget as the current period
comes to a close. Under the fiscal year
approach, the budget year becomes shorter
as the year progresses. However, the
continuous method forces managers to
review and assess the budget estimates for a
never-ending 12-month cycle.
9. Operating budgets
โข The operating budget gathers the projected
results of the operating decisions made by a
company to exploit available business
opportunities. In the final analysis, the operating
budget presents a projected (pro forma) income
statement which displays how much money the
company expects to make.
โข This net income demonstrates the degree to
which management is able to respond to the
market in supplying the right product at an
attractive price, with a profit to the company.
10. MASTER BUDGET
โข The master budget aggregates all business
activities into one comprehensive plan. It is
not a single document, but the compilation of
many interrelated budgets which together
summarize an organization's business
activities for the coming year.
* The operating budget and the financial
budget are the two main components of a
company's master budget.
11. THE SALES FORECAST AND BUDGET
โข The sales budget predicts the number of units
a company expects to sell. From this
information, a company determines how
many units it must produce.
12. THE ENDING INVENTORY BUDGET
โข The ending inventory budget presents the
Rupee value and the number of units a
company wishes to have in inventory at the
end of the period. From this budget, a
company computes its cost of goods sold for
the budgeted income statement.
13. โข THE PRODUCTION BUDGET After it budgets
sales, a company examines how many units it
has on hand and how many it wants at year-
end. From this it calculates the number of
units needed to be produced during the
upcoming period.
14. โข THE DIRECT-LABOR BUDGET Once a company
has determined the number of units of
production, it calculates the number of direct-
labor hours needed. A company states this
budget in the number of units and the total costs.
โข A company may sort and display labor-hours
using parameters such as: the type of operation,
the types of employees used, and the cost
centers involved.
15. โข THE DIRECT-MATERIALS BUDGET With the
estimated level of production in hand, the
company constructs a direct-materials budget
to determine the amount of additional
materials needed to meet the projected
production levels.
16. THE CAPITAL EXPENDITURE BUDGET
โข A company engages in capital budgeting to
identify, evaluate, plan, and finance major
investment projects through which it converts
cash (short-term assets) into longterm assets. A
company uses these new assets, such as
computers, robotics, and modern production
facilities, to improve productivity, increase
market share, and bolster profits
17. โข THE PRODUCTION OVERHEAD BUDGET A
company generally includes all costs, other
than materials and direct labor, in the
production overhead budget. Because of the
diverse and complex nature of business,
production overhead contains numerous
items.
18. โข BUDGET OF COST OF GOODS SOLD At this
point the company has projected the number
of units it expects to sell and has calculated all
the costs associated with the production of
those units. The company will sell some units
from the preceding period's inventory, others
will be goods previously in process, and the
remainder will be produced.
19. โข ADMINISTRATIVE EXPENSE BUDGET In the
administrative expense budget the company
presents how much it expects to spend in
support of the production and sales efforts.
โข The major expenses accounted for in the
administrative budget are: officers' salaries;
office salaries; employee benefits for
administrative employees; payroll taxes for
administrative employees; office supplies and
other office expenses supporting administration;
losses from uncollectible accounts; research and
development costs; mortgage payments
20. BUDGETED INCOME STATEMENT
โข A budgeted income statement combines all the
preceding budgets to show expected revenues
and expenses.
โข To arrive at the net income for the period, the
company includes estimates of sales returns and
allowances, interest income, bond interest
expense, the required provision for income taxes,
and a number of nonoperating income and
expenses, such as dividends received, interest
earned, nonoperating property rental income,
and other such items.
21. FINANCIAL BUDGET
โข The financial budget contains projections for
cash and other balance sheet itemsโassets
and liabilities. It also includes the capital
expenditure budget. It presents a company's
plans for financing its operating and capital
investment activities.
22. THE CASH BUDGET
โข In the cash budget a company estimates all
expected cash flows for the budget period by
stating the cash available at the beginning of the
period, adding cash from sales and other earned
income to arrive at the total cash available, and
then subtracting the projected disbursements for
payables, prepayments, interest and notes
payable, income tax, etc.
23. THE BUDGETED BALANCE SHEET
โข The budgeted balance sheet is a statement of the
assets and liabilities the company expects to have
at the end of the period. The budgeted balance
sheet is more than a collection of residual
balances resulting from the foregoing budget
estimates.
(Since a company prepares the budgeted
balance sheet before the end of the current
period, it uses an estimated beginning balance
sheet.)
24. BUDGETED STATEMENT OF CASH
FLOWS
โข This statement anticipates the timing of the
flow of cash revenues into the business from
all resources, and the outflow of cash in the
form of payables, interest expense, tax
liabilities, dividends, capital expenditures, and
the like.
25. Budgets
โข Variance โ the difference between planned
values and actual values
โ Positive variance โ actual figures less than
planned
โ Negative variance โ actual figures above planned
