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Budgeting
I. Overview
A budget is a qualitative plan used to communicate objectives, motivate employees, control activities, and evaluate performance.
Strategic budgeting.
Budget manual.
Production budget.
Operating budget.
Capital budget, cash budget, and pro forma financial statements.
Capital budget.
Cash budget.
Preparation of budgeted financial statements.
Because they ate prepared before actual activities begin.
The pro forma income statement.
The pro forma balance sheet.
The pro forma statement of cash flows.
- A static budget is based on one level of activity.
- A flexible budget is a series of budgets prepared for many levels of activity so that actual performance can be compared with the appropriate budgeted level.
- In a traditional system, flexible budgets are usually prepared based on one cost driver or measure of activity.
- In an activity-based system, flexible budgets use multiple cost drivers.
Note: Under an activity-based system, the driver analysis and the flexible amounts depend on the cost hierarchy (unit-level, batch-level, product-level, or service-level, and facility-level).
II. Budget Concepts
Budgeting.
- Plan for the future.
- Communicate objectives to all levels of the organization.
- Use the budget to motivate employees.
- Control activities.
- Evaluating performance.
It established standards and facilitates the comparison of actual and budgeted performance.
- Foster the planning of operations.
- provide a framework for performance evaluation.
- Promote communication and coordination among organization segments.
- A strategic budget is long-term planning based on identifying and specifying organizational objectives.
- A strategic budget describes the long-term position, goals, and objectives of an entity within the environment.
- A capital budget involves evaluating specific long-term investment decisions.
- Greater support for the budget and the entity as a whole.
- A greater understanding of what is to be accomplished.
- Greater accuracy of budget estimates.
- To avoid an unfavorable variance from expectation.
- Provide flexibility when unexpected costs arise.
Control involves the comparison of performance with a standard.
Note: If the standard is inaccurate, the value of the comparison is diminished.
- Decrease the effectiveness of the corporate planning process.
- Decrease the ability to identify potential budget weaknesses.
- Decrease the use of effective corrective action.
- Increase the likelihood of inefficient resource allocation.
- Objectives vary with the organization’s type and stage of development.
- Each subunit may have its own specific objectives and a conflict may exist in determining organizational objectives.
Kaizen budgeting.
Government budgeting usually reflects the legal limits on proposed expenditures.
- It is a document adopted in accordance with procedures specified by applicable laws.
- It must be complied with by the administrator of the governmental unit for which the budget is prepared.
- The effectiveness and efficiency of governmental efforts are difficult to measure in the absence of the profit-centered activity that characterizes business operations.
It is a planning process in which each manager justifies a department’s entire budget every year.
- Divides the activities of individual responsibility centers into a series of packages that are prioritized.
- For each budgetary unit, ZBB prepares a decision package describing the various level of service that may be provided, including at least one level lower than the current one.
- Each component is evaluated from a cost-benefit perspective and then prioritized.
ZBB differs from the traditional concept of budgeting in which next year’s budget is largely based on the previous year’s expenditure.
Life-cycle budget.
- It emphasizes the need to budget revenue to cover all costs when revenue and related costs do not occur in the same periods.
- Costs are determined for all value-chain categories to highlight upstream and downstream costs that often receive insufficient attention.
- Upstream (R&D, design).
- Manufacturing.
- Downstream (marketing, distribution, and customer services).
III. Types of budgets
- A flexible budget allows adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results.
- The master budget contains estimates by management from all functional areas based on one level of production.
- A flexible budget can be prepared for any production level within a relevant range, but the master budget is based on one level of production.
Production volume, finished goods inventory, and sales volume.
It is calculated from the desired ending inventory and the sales forecast.
Cash budget.
A schedule of estimated cash collections and payments.
Note: Inputs to the cash budget process come from the operating and capital budgets.
Statement of cash flow.
IV. Budgetary Control
A planning calendar.
Budget manual.
Because after the budget schedule is prepared, other departments within the organization will use the schedule to prepare their own budgets.
Note: Without distribution instructions, a manager who needs a schedule may be overlooked.
V. Flexible budgets
It should be based on the budget adjusted to the actual level of activity for the reported period.
A flexible budget provides cost allowances for different levels of activity, but a static budget provides costs for one level of activity.
Flexible budget variance.
Standard costs are predetermined, attainable unit costs.
Because standard costs represent what costs should be, whereas budgeted costs represent expected actual costs.
Because fixed costs do not change as activity levels change.