BUDGETING
Budget is a document which contains financial/quantitative information for next
12 months. It includes Budgeted sales revenue, costs, profit and cash budget.
There are different types of budgets:
1. Functional Budgets: These budgets are relevant with different departments of
the organization like production, sales, Overheads and etc.
i) Sales revenue budget (1)= Bud. Sales units(2)*Bud. Selling price per unit $(3)
ii) Budgeted sales units(1) = Opening stock units(2) + Production units (3)– Closing
stock units(4)
iii) Material usage budget= Bud. Mat. Usage/unit *Bud. Production units
iv) Material Purchases budget= Bud. Mat. Usage + Closing stock of raw material –
Opening stock of raw material
v) Material cost budget =Budgeted Material purchases*Bud. Mat. Price/kg
vi) Labour hours budget = Bud. Production units *Bud. Lab. Hrs/unit
vii) Labour cost budget = Bud. Lab. Hrs * Bud. Labour rate per hour
viii) Variable oh’s Budget = Bud. Lab. Hrs*Bud. V.oh’s per hour
ix) Fixed oh’s Budget = OAR/unit * Budgeted activity level
Master Budget :
i) Budgeted Profit & Loss (Accruals Accounting)
ii) Budgeted Cash flow statement
iii) Budgeted Balance Sheet
Budgeted cash flow statement means difference between cash receipts and cash
payments . It is based on Cash accounting.
Fixed, Flexible and Flexed Budget:
Fixed Budget: In this budget quantity , costs and selling price will remain fixed for
next 12 months.
Flexible Budget: In this approach company will prepare more than one budget or
usually budget at three activity levels like lowest, medium and highest. Purpose of
this approach is to know the cost behavior , which one of the costs are variable,
which are fixed and which one are semi variable cost.
Flexed Budget: In this approach company multiply their budgeted variable cost
per unit and budgeted selling price per unit with actual production and sales
units. In this budget fixed cost will remain unchanged because it does not vary
with activity level. This budget is used to calculate variances .
Other types of budgeting :
Incremental budgets
Rolling or continuous budget
Zero based budget
Incremental budgeting: In this budget company will bring percentage changes in
their last year’s actual result. Like % increase in selling price, % change in costs,%
change in production and sales volume.
This budget is useful in consumer products where % changes are incorporated.
Management put more attention towards actual work rather than budgeting . In
fact this approach makes budgeting a less useful activity in front of management.
Rolling budget: To prepare more than one budget in one accounting period.
Purpose of this approach is to avoid significant variances.
Zero based budgeting : In this approach company will prepare a new budget from
scratch. This approach is mainly used by public organization or technology
companies . In fact this approach does not consider previous year’s in formation
as relevant information for next accounting period. This budget is useful for
discretionary costs.
Difficulty level of budget:
1. Aspiration budget: This budget contains challenging targets . On achievement
of those targets management will earn rewards. It helps to motivate workforce.
2. Expectations budget: This budget is not a challenging budget. It does not carry
rewards that’s why management will not feel motivated.
Management Behaviours:
1.Goal Congruence: In this approach all departmental managers are putting
efforts towards organizational goals rather than their personal goals.
2. Budgetary slack: In this approach managers are focusing on their personal goals
or they will easy targets for themselves. It is also called budget biasness. Focus on
personal goals is also called no goal congruence approach.
Motivational approaches towards budgeting :
1. Top down approach : In this approach budget is prepared by senior
management prepares budget and they expect from managers to achieve those
targets but there’s no input is provided by management . At times senior
managers set ideal or difficult targets for juniors. This approach is also called
imposed budgeting and it demotivates managers and other workforce.
2. Bottom up approach : In this approach targets are set by managers for their
departments. It helps to motivate them but it is also expected that they will set
some easy targets for themselves which is called budgetary slack.
