Budgeting

• Budget - a detailed plan that translates the company's objectives into financial terms.
• Kinds of budget

  1. Master budget or profit plan
  2. Budgeted FS
  3. Capital budget
  4. Financial budget
• Master budget - a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time
• A master budget contains individual budgets that can be classified as either operating or financial budgets.
• Operating budgets - cover the organization's planned operating activities for a period including sales, production, RM purchases, DL, MOH, and S&A expenses.
• Financial budgets - focus on the financial resources needed to support operations
• Sales budget - is the starting point of master budget.
• Budgeted sales revenue = expected sales x budgeted sales price
• Purchasing budget - this budget shows the number of units that are to be purchased during a budget period. The budgeted purchases will form part of our cash disbursement
• Budgeted sales in units xx

  Add: Req. EI xx

  Total units req xx

  Less: Est. BI (xx)

  Units to be purchased xx

  Multiply: Purchase price/unit xx

  Budgeted purchases xx
• Production budget - this shows the number of units that are to be produced during a budget period. It serves as a bridge between the sales budget and the operational budgets that plan for spending on production.
• Raw materials purchase budget - this depends on budgeted production needs and on planned levels of beginning and ending rm inventory.
• Direct labor budget
• MOH Budget - shows us the variable and fixed moh incurred by the company based on the budgeted production acquired in the production budget.
• Budgeted COGS - this budget reflects all of the costs incurred to make a physical product
• Cash receipts budget - provides information about the cash flows into the company based on sales of its service or products
• Cash disbursement budget - this budget depends on the spending plans reflected in several operational budgets
• In the cash disbursement budget

  S1: Depreciation expense should be deducted form MOH

  S2: BDE should be deducted from operating expenses

  Both statements are correct.
• Cash budget - this is a summary of the various cash inflows and outflows from operations
• Beg cash bal xx

  Add: Budg cash receipts xx

  Less: Budg cash disb xx

  End cash bal xx
• Types of budgets

  1. Participative
  2. Top-down vs bottom up
  3. Budgetary slack
  4. Zero-based
  5. Continuous
  6. Flexible
  7. Static
  8. Incremental
  9. Life-cycle
  10. Kaizen
• Top-down approach - budgeting approach set by the management and imposed on lower levels. This may impair goal congruence.
• Budgetary slack - making the budget look good by either understating expected sales or overstating budgeted expenses
• The ideal financial planning process would be a combination of top-down and bottom-up approach
• A static budget is one prepared for just one level of activity. It remains unchanged and is used continuously throughout the year for comparison with actual results.
• Flexible budgeting, firm prepares a series of budgets for many levels of sales and production.