Budgeting
LECTURER : MAMOLIEHI MATSOBANE
SUBJECT : BA2
SEMESTER : JD 2022
Introduction
• A budget is a quantitative statement, for a defined period of time.
• Budgeting is an essential tool for management accounting for both planning and
controlling future activity.
• Includes planned revenues, expenses, assets, liabilities & cash flow. It is:
- Prepared & approved before the start of the period
- Quantitative / financial statement with an action plan
- All about planning for future periods & controlling activities
- Includes statement showing income, expenditure, cash flow & capital to
be employed
- Provides focus for organisation, aids co-ordination of activities & facilitates
control through comparison of actual costs with a flexible budget.
Purposes of budgeting
PLANNING
COORDINATION AUTHORISATION
BUDGET
COMMUNICATION CONTROLLING
Functions Of Budgeting
Planning Coordinating
• Budgets are primarily statements • Budgeting necessitates inter-
showing the operational planning departmental dialogue, individual
of an organisation departmental budgets fit in with
the common organisational goal
Control
Motivation
• Budgetary control helps
• Budget motivates managers to management to take timely
perform in line with organisational corrective action when actual
goals / objectives and encourages performance is not in line with
team spirit while meeting the goals budget
Performance evaluation Communication
• Manager’s performance is • Top to bottom communicate about
evaluated on the basis of whether plans to be implemented & flow of
his department achieved the feedback from supervisory level to
budget target management
Preparation of functional budgets
Sales budget (units)
Adjust for changes in inventory levels
Production Budget (Units) Labour Budget
multiplied by materials usage per unit
Materials usage Budget
Adjust for changes in inventory levels
Materials Purchases Budget
Adjusting for changes in the level of
inventory
Opening inventory + Production = Units sold + Closing inventory
Production (units) = Units sold + Closing inventory - Opening inventory
Materials used (kgs) = Production units x kgs/unit
Purchases (kgs) = Materials used + Closing inventory - Opening inventory
Cash Budgets
Month 1 Month 2 Month 3
Receipts
Receivables X X X
Cash Sales X X X
Loan X
X X X
Payments
Trade Payables X X X
Cash Purchases X X X
Fixed Assets X
X X X
Net Cash Flow X X X
Add: Opening Balance X X X
Closing Balance X X X
Phasing of Sales Receipts
Month 1 Month 2 Month 3 Month 4
Sales $40,000 $35,000 $47,000 $60,000
Invoices paid in month of sale 60% 60%
Invoices paid one month later 25% 25%
Invoices paid two months later 15% 15%
100%
Flexed Budgets
Fixed Flexed Actual
Budget Budget Results Variance
10,000 units 12,000 units 12,000 units
$ $ $ $
Sales 200,000 240,000 235,000 (5,000)
Direct Materials 20,000 24,000 24,600 (600)
Flex
Direct Labour 60,000 72,000 70,000 2,000
Admin Costs 10,000 10,000 11,000 (1,000)
Selling and Dist 30,000 30,000 28,000 2,000
Compare
Profit 80,000 104,000 101,400
Volume Variance Budget Variance
Variable costs are flexed to the actual volume produced and sold to allow
meaningful comparison to actual results
