1. BUDGETING ? ? ? ? Sales projections Inventory needs Business trends
New
competition

2. What is a budget?
A formalized plan describing the use and source of financial and operating resources over a given time period

3. PURPOSES OF BUDGETING Forces management planning Motivation
Evaluation and control
Communication
Coordination
Education

4. FEATURES OF A SOUND BUDGETARY SYSTEM
Participative budgeting
Frequent feedback on performance
Realistic standards
Controllability
Flexible budgeting
Multiple measures of performance
Monetary and nonmonetary incentives

5. The Budgeting Process

6. Strategic
Plan
Monitoring of
Actual
Activity
Long-Term
Objectives
Short-Term
Objectives
Comparison of
Actual &
Planned
Short-Term
Plan
Budgets
Investigation
Feedback
Corrective
Action

7. The MASTER BUDGET is a collection of various types of budgets
Sales
Production
Purchases (Direct materials)
Labor
Manufacturing overhead
Administrative
Cash

8. Master Budget Outputs

9. OPERATING BUDGETS
Sales plan
Production plan
Materials purchasing plan
Labor hiring and training plan
Capital spending plan
Administrative and discretionary spending plan

10. Sales Budget The sales budget represents the expected quantity
of each type of product/service
to be sold multiplied by
its expected selling price.

11. Generic budget format
Amount needed for current requirements
+ Amount desired for future needs
= Total needs
- What is already on hand
= Amount to be acquired

12. Production Predicted sales quantity + Desired ending inventory
Note the sales
budget figure will
be the starting
point for
this budget.
Predicted sales quantity
+ Desired ending inventory
Total needed units
- Amount already on hand (beginning inventory)
Units to be produced

13. Direct Materials (Purchasing)
This budget is for planning the acquisition of raw materials to support the organization’s production needs identified in the production budget.
Units to be produced
x Raw material required per unit produced
Total raw material needed for production
+ Desired ending inventory
= Total raw material needed
- Inventory on hand
= Raw materials to be acquired

14. CAPITAL BUDGET
Purpose is to plan for the acquisition of land, buildings, and capital equipment for expansion and/or replacement.

15. Master Budget usually presented in three forms:
FINANCIAL BUDGETS
Master Budget usually presented in three forms:
A statement of expected cash flows
The projected balance sheet
The projected income statement

16. FLEXIBLE vs. STATIC BUDGETS
Flexible budgets - those that vary with the activity level in the firm
Static budgets - those that do not change with changes in activity levels
The use of the budget data determines which type of budget is most appropriate

17. BUDGETING APPROACHES Incremental budgeting Zero-based budgeting
A budgeting approach that assumes the starting point for each budget item is the amount spent on it in the previous budget
The new budget is seen as last year’s +/- a specified increment
Less costly but may not be strategically sound
Zero-based budgeting
A budgeting approach that assumes the starting point for each budget item is zero
Essential feature is a review of the necessity of each expenditure element/activity as part of the budgeting process
More costly but more strategically sound

18. Behavioral Aspects of Budgeting

19. DESIGNING THE BUDGET PROCESS
How should budgets be determined?
Who should be involved in the budgeting process?
At what level of difficulty should the budget be set to have the greatest positive influence on people’s motivation and performance?

20. Top management wants our
budget figures for the month.
What should we tell them?