AC202 –Second Semester

2016/2017
MANAGEMERIAL ACCOUNTING II

TOPIC: Planning and Budgeting

 Topic Coverage
1. Meaning of budget
2. Rationale/Advantages of budget
3. Characteristics of successful
budget
4. Administration of budgets
5. Approaches/Budgeting techniques
6. Types of budgets
7. Budgeting process
8. Behavioural aspects of budgeting
 1. Meaning of budget
Budget can be defined as a
quantitative or numerical expression
of an entity’s plan and objectives for
the next accounting period.

Such quantitative expression may be

either in monetary terms or in units
 1. Meaning of budget cont..

Budget is future oriented [Forward

looking in nature]
Examples of budgets includes: Sales
budget, Production budget, Raw
material Purchase budget, Material
usage budget, Direct labour budget,
Cash budget etc.
 1. Meaning of budget cont..

• Budgeting is one among the steps in

planning process.

• Planning is the process of designing

the desired future and effective
means(strategies) of achieving it.
 1. Meaning of budget cont..

Stages in the planning process

1. Establishing objectives-establishing
the goal that the entity wishes to
achieve.
2. Identify potential strategies-These
are possible courses of action that
might enable the entity to achieve its
objectives.
 1. Meaning of budget cont..
3.Evaluation of strategic options-This
involves assessing the strategies
based on their suitability, feasibility
and acceptability
4. Select course of action(strategy)-
Once the strategies are selected, long
term plan should be created to
implement the strategies.
 1. Meaning of budget cont..

5. Implementation of long term.

- Budgeting is concerned with
implementation of the long term plan
for the year ahead.
6. Monitor actual outcomes
7. Respond to divergencies from the
planned outcome
 2.Rationale/Advantages/Fun
ctions of budget
1. Systematic planning of annual,
quarterly or weekly operations
2. Coordination of an entity’s activities
3. Communication of plans and
respective objectives to various
responsibility centers/sections or
departments
 2.Rationale/Advantages/Fun
ctions of budget cont..
4. Efficient allocation of resources
5. Framework or yardstick for
measuring performance of the
manager and or the entity as a
whole
6. Control tool for the entity’s activities
7. Motivate managers and employees
 3. Characteristics of
Successful Budget
1. Must be in line with the entity’s
plans-both short & long term plans
2. Must receive management support at
all levels
3. People responsible for the
implementation or delivery of the
budget must have input into the
development of it
3. Characteristics of
Successful Budget cont..
4. It should be seen as the motivational
tool
5. Budget should be an accurate
representation of what is expected to
occur
6. Budget should be flexible to
accommodate changes in the business
environment during the budgeted
period
 3. Characteristics of
Successful Budget cont..
7. Budget should be coordinated among
all depts. & divisions in the company
8. Time period included in the budget
should match its purpose
 4. Administration of budget
cont..
1. The Budget Committee
 Consists of Directors, Managers, Heads of
different sections(those who represent
major segments of the business)
 The CEO or Managing Director or
General Manager chairs the committee
 Its main task is to ensure that budgets are
realistically established and they are well
coordinated.
 4. Administration of budget
2. The budget Officer or Secretary
 Accountant/Chief accountant
 Is normally appointed by budget committee
 His/her main task is to coordinate the
individual budgets into a budget for the
whole organization

3. Budget Manual
 Set of instructions on how budget will be
prepared & delivered/implemented
 5. Budgeting Techniques
1. Cummulative/Incremental
budgeting
 Previous period‘s budget figures are
just adjusted with inflation rate
 Most applicable by govts.
 Simple to prepare
 What are its disadvantages? Home
work!
 5. Budgeting Techniques
cont..
2. Zero based budgeting
 Starts afresh -Previous period’s budget
figures are not considered
 It is more rational as everything needs
justification before inclusion
 Most applicable in charitable
organizations
 What are its disadvantages? (Your Home
Work!)
 5. Budgeting Techniques
cont..
3. Rolling budget
 For each month, a budget for the next
twelve months is prepared
 It replaces every budget time/month
elapsed with another taking into account
changes thereof as reflected in the period
elapsed.
 It is always more –up-to-date and accurate
budget
 5. Budgeting Techniques
cont..
 E.g. Dec 2016: Jan 2017 – Dec 2017
Jan 2017: Feb 2017 – Jan 2018
Feb 2017: March 2017 – Feb 2018
 What are its disadvantages? ( Your Home
Work!)

4. Activity based budgeting (Your Home

Work!)
 6. Types of budgets
1. Functional/Operational budgets
 E.g. Sales budget, Production budget,
Material Purchases budget, driect labour
budget, etc.

2. Financial budgets
 E.g. Csh budget, budgeted income
statement, and budgeted balance sheet
6. Types of budgets cont..
3. Capital budget
These involves acquisition and disposal
of non current assets.

4. Master budget: - Functional +

Financial + Capital acquisition
Budgets
7. The Budgeting Process
1. Communication of budget’s policy and guidelines
to the people responsible for the preparation of the
budget
2. Determination of the Principal /Key Budget Factor
i.e. the factor that restricts output/ scope of
operations
3. Preparation of sales budget
4. Initial Preparation of budgets: These are production
budget, material purchase budget, material
consumption budget, direct labor (man power)
budget, manufacturing overhead budget ,selling,
administration budget
 7. The Budgeting Process
cont..
5. Negotiation of budgets-Budgets are
submitted for approval

6. Coordination and review of budgets

This is to ensure that the budgets are
compatible with each other. Also cash
budget, budgeted income statement and
budgeted balance sheet are prepared to
ensure that all parts combine to produce an
acceptable whole.
 7. The Budgeting Process
cont..
7. Final acceptance of the budgets: When the
budgets are in harmony with each other, they
are summarized into a master budget.

8. Budget Review: Involves comparing actual

results against budgeted results and
investigate the reasons for material
deviations.
7.1 Determining the Principal
/Key Budget Factor
• It is the factor that restricts output/ scope of
operations
• The key budget factor can be one of the following:

1. Market Demand
2. Plant Production Capacity
3. Availability of Materials
4. Availability of Man Power Needed ( Labour
needed)

• Note: In most cases, market demand (Sales) stands as the

principal/key budget factor
 7.2 The Sales Budget
 It forecasts/predicts the demand/sales for the period
concerned
 It is the first budget to be prepared because many
other budgets depend on it
 It is the key to the entire process i.e. the principal
factor
 It is expressed in both shillings and units of product
 Uses expected selling price to multiply unit sales to
revenues
 An aggregate sales budget is influenced by economic
conditions, pricing decisions, competition, marketing
programs, etc.
 7.2 The Sales Budget cont…
Steps: Preparing a Sales Budget:

1. Forecast and record the projected units broken down by quarters

(this information is provided by the sales manager), through either:

 Customer Survey
 Market Research, or
 Statistical Model Analysis

1. Record the Projected Selling Price per Unit.

2. Calculate the estimated amount of sales revenue
 7.2 The Sales Budget cont…
Steps: Preparing a Sales Budget- Class Example 1
• Azam Ltd, a manufacturing business that sells a variety of ice-
creams, wants a sales budget prepared, beginning January 1, 2018.
The Sales Manager Mr. Ally has projected the following sales
information:
 1st Quarter 700 units
 2nd Quarter 850 units
 3rd Quarter 1,000 units
 4th Quarter 1,150 units
 Projected selling price is TZS900/unit.
• Required: Prepare the sales budget for the year ending December
31st 2018
7.2 The Sales Budget cont…
 7.3 Production Budget
• An estimate of the number of units to be produced
in the next accounting/production period
• It uses the sales budget for projecting units to be
produced
• That’s, production budget won’t be accurate unless
the sales budget is accurate
• The production budget is the basis for projecting the
Cost of raw materials purchases, the cost of raw
material usage and the cost of labour
• It is expressed in units of product(s)
 7.3 Production Budget cont..
1. Record projected units to be sold (from Sales Budget).

2. Record desired number of units in ending inventory. (Usually

a percentage of next quarter's needs as per company policy).

3. Add to determine the Units needed.

4. Record the projected units in beginning inventory.

***Beginning inventory is last period/quarter's ending
inventory.

5. Subtract to determine the projected production for the next

period/quarter
 7.3 Production Budget cont..
Steps: Preparing a Production Budget- Class Example 2
In addition to the Azam Ltd’s Sales Manager (refer the
class example 1), Production Manager gave the
following information:
• Ending Inventory is to be 30% of next month’s sales need
• Next year’s 1st Quarter needs: 1,280 units
• Beginning Inventory for the 1st Quarter is 200 units.

Required: Prepare the production budget for the year

ending 31st December 2018
 7.3 Production Budget cont..
Azam Ltd Production Budget For
Year Ending 31st December 2018
Q1 Q2 Q3 Q4 TOTAL
Budgeted sales 700 850 1,000 1,150 3,700
Desired closing stock(30%) 255 300 345 384 1,284
Total units needed 955 1,150 1,345 1,534 4,984
Less:Opening stock (200) (255) (300) (345) (1,100)
Units to produce 755 895 1,045 1,189 3,884
 7.3 Production Budget cont..
Steps: Preparing a Production Budget-
Class Example 2
Workings Note:

 Ending Inventory = 30% of next month’s sales need

**rounded to the nearest 10.
e.g. 1st Quarter: 0.30 x 850units = 255
e.g 4th Quarter: 0.30 x 1280units = 384

 Beginning Inventory is last Month’s ending inventory

 1st Quarter Beginning Inventory is 200 units

7.4 Direct Materials Purchase
Budget
• It provides an estimate of the
money value of the direct
materials to be purchased for the
budgeted period
• It bases on the production budget
(units to be produced for the
period)
• It is expressed either in units or
shillings
7.4 Direct Materials Purchase
Budget cont..
1. Record projected units to be
produced (from Production
Budget).
2. Multiply by the Raw Materials
Needed per Unit to calculate the
amount of materials needed.
3. Calculate the desired ending
inventory (as provided for in the
company’s policy).
7.4 Direct Materials Purchase
Budget cont..
4. Add to calculate Total Direct
Materials needed.
5. Subtract the beginning inventory
(which is last quarter's ending
inventory) to calculate the Direct
Raw Materials Needed to be
Purchased.
6. Calculate the Cost of Raw Materials
based on price per unit of direct raw
material
7.4 Direct Materials Purchase
Budget cont..
Steps: Preparing a Direct Material Purchase Budget- Class Example 3

• In addition to the Azam Ltd’s Production Manager information in example

2, the Manufacturing Manager made the following estimates:
 2kgs of direct materials per unit of product
 TZS52.50 per kg of direct materials
 2 .00 Direct Labour Hours per Unit of Product
 TZS87.50 per direct labour
 TZS75 manufacturing overhead cost per unit of product
 Depreciation of Manufacturing Overhead is TZS20,000
divided evenly over the 4 quarters.

• Required: Prepare the Direct Material Purchase Budget for the year
ending 31st December 2018
7.4 Direct Materials Purchase
Budget cont..
Steps: Preparing a Direct Material Purchase Budget- Class
Example 3
Workings Note:
*** 2Kgs of Direct Materiala are needed for each unit
***TZS52.50/ kg of Direct Materials

***Cost of Direct Masterials in Ending Inventory = End. Inventory (Pdn Budget)

2kg x TZS52.50/=

***Cost of Direct Materials in Beginning Inventory = begin. Inventory (Pdn

Budget) x 2kg x TZS52.50/=

**Note: Beginning Inventory is the last period’s/quarter’s Ending Inventory

7.4 Direct Materials Purchase
Budget cont..
• Azam Ltd Direct Materials Purchase Budget For Year Ending 31st December 2015

Units to be produced 755 895 1,045 1,189 3,784

X materials per unit(in kg) 2 2 2 2 2
Materials needed for units to be1,510
produced1,790
(kgs) 2,090 2,378 7,568
X Cost/ Unit of Material (in TZS)52.5 52.5 52.5 52.5 52.5
Cost of Materials for Units to be
79,275
Produced93,975 109,725 124,845 397,320
Add: Cost of materials in Ending Inventory
26,775 31,500 33,075 40,320 131,670
Total cost of Materials
Needed 106,050 125,475 142,800 165,165 528,990
Less: Cost of materials in
Beginning Inventory (21,000) (26,775) (31,500) (33,075) (112,350)
Total Cost of Materials
to Purchase 85,050 98,700 111,300 132,090 416,640
 7.5 Direct Materials Usage
Budget
• It forecasts/predicts quantity of
raw materials to be used in
production for the budgeted
period
• It uses the production budget as
its base (Units to be produced)
• It is expressed in units
 7.5 Direct Materials Usage
Budget cont…
Steps: Preparing a Direct Materials Usage
Budget:

1. Record projected units to be produced (from

Production Budget).

2. Record the Quantity of Direct materials Needed

per Unit of product

3. Multiply by the Quantity Direct Materials Needed

per Unit to calculate the quantity of direct
materials to be used in the production process for
the budgeted period.
 7.5 Direct Materials Usage
Budget cont…
Steps: Preparing a Direct
Material Usage Budget- Class
Example 4

• Using examples 2 and and 3,

information, Prepare the Azam
Ltd’s Direct Material Usage
Budget for the year ending 31st
December 2018
 7.5 Direct Materials Usage
Budget cont…
• Azam Ltd Direct Materials Usage
Budget For Year Ending 31st
December 2018
Units to be produced 755 895 1,015 1,119 3,784
X materials per unit(in kg) 2 2 2 2 2
Direct Materials Usage (Kgs) 1,510 1,790 2,030 2,238 7,568
 7.6 Direct Labour Budget
• Once the Production Budget has
been completed, the Direct
Labour Budget can be prepared
• Allows the company to know in
advance possible labour
requirements
• typically expressed in labour
hours and shillings
 7.6 Direct Labour Budget
cont..
Steps: Preparing a Direct Labour Budget:
1. Record projected units to be produced
(from Production Budget).
2. Record Direct Labour hours Needed per
Unit of Product
3. Multiply Direct Labour Hours /unit by Units
to be produced to get total Direct Labour
Hours Needed
4. Record Cost per Direct Labour Hours
5. Multiply Cost per Direct Labour Hour by
Direct Labour Hour Needed to get Total
Direct Labour Cost
 7.6 Direct Labour Budget
cont..
Steps: Preparing a Direct
Labour Budget- Class Example 5

• Using examples 2 and 3

information, prepare Azam Ltd’s
Direct Labour Budget for the year
ending 31st December 2018
 7.6 Direct Labour Budget
cont..
• Azam Ltd Direct Labour Budget For Year Ending 31st December 2018

Units to be Produced 755 895 1,045 1,189 3,784

Direct Labour Hour/
Unit(hours) 2 2 2 2 2
Total Direct Labour Hours
Needed 1,510 1,790 2,090 2,378 7,568
X Cost/Direct Labour Hour
(TZS) 88 88 88 88 88
Total Direct Labour Cost 132,125 156,625 182,875 208,075 662,200
7.7. Manufacturing Overhead
Budget
• Typically expressed in monetary
terms/shillings
• should provide a schedule of all
costs of production other than direct
materials and direct labour
• provides an estimate of the
overhead cost that will be incurred
in the budgeted period
• based on a predetermined overhead
rate
7.7. Manufacturing Overhead
Budget cont..
Steps: Preparing a Manufacturing
Overhead Budget:
Record projected units to be produced
(from Production Budget).
 Multiply by the Variable Overhead Rate
to calculate the Budgeted Variable
Overhead.
 Add any Budgeted Fixed Overhead to
calculate the Total Budgeted Overhead.
 Subtract the Depreciation to calculate
the Cash Disbursements for overhead.
7.7. Manufacturing Overhead
Budget cont..
• Steps: Preparing a Manufacturing
Overhead Budget: Class Example
6

• Using examples 2 and 3

information, prepare Azam Ltd’s
Manufacturing Overhead Budget
for the year ending 31st December
2015
 7.7. Manufacturing Overhead
Budget cont..
• Azam Ltd Manufacturing Overhead Budget For
Year Ending 31st December 2018

Units to be Produced 755 895 1,045 1,189 3,784

X Overhead Rate (TZS) 75 75 75 75 75
Total Budgeted OH 56,625 67,125 78,375 89,175 283,800
Less: Depreciation (5,000) (5,000) (5,000) (5,000) (5,000)
Total Budgeted Manufacturing
Overhed-Cash 51,625 62,125 73,375 84,175 278,800
 7.8 Selling and Administrative
Expenses Budget
• Forecasts/anticipates
selling/Administrative expenses
from the Sales and Cost of Goods
Sold, and Inventory/Cost of Goods
Produced
• May include the budgets of various
individuals or groups involved in
selling and administration
• Selling and Administrative Expenses
Budget may be combined or
separated
 7.8 Selling and Administrative
Expenses Budget cont..
• Selling expenses portion contains
both variable (shipping costs,
sales commission) and fixed
(advertising and sales salaries)
items
• Administrative expenses portion
contains mostly fixed items
(executive salaries and
depreciation on company offices)
 7.8 Selling and Administrative
Expenses Budget cont..
Steps: Preparing a Selling Expenses
Budget:
1. Record projected Unit Sales (from Sales Budget).
2. List the Variable Selling Expenses and calculate based
on guidelines provided.
3. List the Fixed Selling Expenses and calculate based on
guidelines provided.
4. Add to calculate the Total Budgeted Selling Expenses.
5. List any related Depreciation Expense.
6. Subtract (depreciation expense) to calculate Cash
Requirement for Selling Expenses.
 7.8 Selling and Administrative
Expenses Budget cont..
Steps: Preparing an Administrative
Expenses Budget:
1. List the Variable Administrative Expenses and calculate
based on guidelines provided.
2. List the Fixed Administrative Expenses and calculate
based on guidelines provided.
3. Add to calculate the Total Administrative Expenses.
4. List any Bad Debts Expense.
5. Subtract bad debts to calculate the Cash Requirement
for Administrative Expenses.
 7.8 Selling and Administrative
Expenses Budget cont..
Steps: Preparing Selling and
Administrative Expenses Budgets:
Class Example 7
The Azam Ltd’s Accounting Department
Manager has provided the following
information:
 Selling Expenses:
• Variable: Commission 5% of Sales
• Fixed: (split evenly over the 4 quarters)
Rent TZS120,000per year
Advertising TZS40000 per year
Telephone TZS80,000 per year
 7.8 Selling and Administrative
Expenses Budget cont..
 Administrative Expenses:
• Variable bad debts Expense: Estimated at
1% of sales
• Fixed: (split evenly over the 4 quarters)
Salaries TZS600,000 per year
Insurance TZS44,000 per year
Telephone TZS80,000 per year
Supplies TZS80,000 per year
Other Expenses TZS40,000 per year
Required: Prepare separately, the
Selling and Administrative Budgets
for the year ending 31st December
2018
 7.8 Selling and Administrative
Expenses Budget cont..
• Azam Ltd Selling Expenses Budget For Year Ending 31st
December 2018

Q1 Q2 Q3 Q4 TOTAL
Budgeted Sales (TZS) 630,000 765,000 900,000 1,035,000 3,330,000
5% Sales Commission 31,500 38,250 45,000 51,750 166,500
Rent 30,000 30,000 30,000 30,000 120,000
Advertising 10,000 10,000 10,000 10,000 40,000
Telephone 20,000 20,000 20,000 20,000 80,000
Other Expenses 20,000 20,000 20,000 20,000 80,000
Total Selling Expenses (TZS) 111,500 118,250 125,000 131,750 486,500
 7.8 Selling and Administrative
Expenses Budget cont..
• Azam Ltd Administrative Expenses Budget For Year
Ending 31st December 2018

Q1 Q2 Q3 Q4 TOTAL
Salaries 150,000 150,000 150,000 150,000 600,000
Insurance 11,000 11,000 11,000 11,000 44,000
Telephone 20,000 20,000 20,000 20,000 80,000
Supplies 20,000 20,000 20,000 20,000 80,000
Other Expenses 10,000 10,000 10,000 10,000 40,000
Total Administrative
Expenses 211,000 211,000 211,000 211,000 844,000