MANAGEMENT
ACCOUNTING
Topic: Budgeting
and Budgetary Process
Note: Watch out for real workings of Cash Budget in the next post
CONCEPT AND MEANING
OF BUDGET
The Institute of Cost and Management
Accountants (ICMA) defined budget as a plan quantified in monetary terms,
prepared and approved prior to a defined period of time, usually showing
planned incomes to be generated and/or expenditure to be incurred during that
period, and the capital to be employed to attain a given objective.
A budget is also defined as a
predetermined statement of management policy which provides for comparison of
the result actually achieved during a given period.
A budget is further defined as a financial
and/or quantitative statement prepared and approved prior to a defined period
of time, of the policy to be pursued during that period for the purpose of
attaining a given objective. It may
include income, expenditure and the employment of capital.
Note: Budgetary control is the
establishment of budgets relating the responsibilities of executives to the requirements
of a policy, and the continuous comparison of actual with budgeted results
either to secure by individual action the objectives of that policy or to
provide a basis for its revision.
OBJECTIVES OF BUDGETS:
A budget is designed to achieve
the following;
1. Planning: - Management is sparred to
look ahead, make plans to achieve targets thereby giving the organization purpose
and direction.
2. Co-ordination: - The activities of the
various functional areas of the business are co-ordinate through the budgetary
cycle.
3. Performance Evaluation: - The
preparation of budget and budgetary control provides a basis for performance
evaluation of the business.
4. Assist Management Action: - Budgets
assists and encourages management to be more financially aware of their actions
and an area requires most attention.
5. Motivation: Budgets encourage motivation
since employees are aware of the plans for the achievement of the corporate
targets or goals.
6. Communication:- Budgets ensures that
plans, actions, reactions and variance are communicated to and fro the functional
managers.
BUDGET CENTRE – This is an identified section or department of an organization
known for the purpose of the budget as cost centre. A budget centre should be the responsibility
area of a manager so that the manger is aware of the budget performance.
PRINCIPAL BUDGET FACTOR (BUDGET KEY FACTOR OR BUDGET LIMITING FACTOR)
– This is a constraint or limitations on the activities of the organization.
Principal budget factor may be sales, skilled labour, raw materials, space,
customer demand, production capacity.
BUDGET PERIOD – this is the time framework of a budget. It may be annual (yearly), weekly, monthly, 3
years, 10 years etc.
PROCESS OF BUDGETING – The budgetary process is coordinated by a
budget committee. A sample outline of
the budgetary process is as follows:
a. Formation
of budget committee
b. Derive
key forecasts
c. Prepare
quantity budgets with appropriate managers
d. Check
feasibility and adherence to the policies of quantity budgets
e. Amend
if necessary
f.
Produce Financial budgets
g. Produce
master budgets
h. Submit
budgets to chief executive for approval/amendment
i.
Published agreed budgets for ensuring period
j.
Recording of actual results
k. Actual/budget
comparison and identification of variances
l.
Reporting to budget holders and senior management
m. Variance
investigation
n. Developing
solutions to problem revealed by budgetary control.
BUDGET MANUAL – This is a procedure, guidance or rule book which
sets out standing instructions governing the responsibilities of persons, and
the procedures, forms and records relating to the preparation and use of
budgets.
BUDGET COMMITTEE AND BUDGET OFFICER – The budget committee is the
committee that has the overall responsibility for budget preparation and
administration. The membership of the
budget committee varies between organizations but usually comprises people from
various functions of the company.
The committee would be served by
the budget officer who is usually the accountant. The Chief Executive Officer is usually the
Chairman of the budget committee.
BUDGETING METHOD – Management uses various methods of budgeting for
planning and control purposes. The major
types of budgeting methods are; 1. Fixed budget 2. Flexible Budget 3. Rolling
Budget (continuous) 4. Zero Based Budgeting.
TYPES OF BUDGET
The types of budgets found in a typical
manufacturing business are:
a. Sales
Budget
b. Selling
and distribution costs budget
c. Administration
cost budget
d. Debtors
budget
e. Finished
Goods stock budget
f.
Production budget
g. Material
usage budget
h. Machine
utilization budget
i.
Material purchases budget
j.
Direct Labour budget
k. Creditors
budget
l.
Production overhead budget
m. Cash
budget
n. Capital
expenditure budget
o. Research
and development budget
p. Master
budget i.e. budgeted statement of profit and loss and statement of financial
position sheet. Note that all the budgets from A to P above are known as functional
budgets. Thus functional budgets are
segmented on; functional activities of the organization. The master budget is prepared from summaries of
the functional budgets.
PREPARATION OF SALES – Sales Budget is the primary budget from which
the majority of the other budgets are derived.
Sales volume is the principal budget factor for most organizations.
Sales budgets are derived from sales forecasts.
CASH BUDGET – is one of the most important budgets because cash
flow management and liquidity are vital for efficient working of any organization.
The cash budget shows detailed cash flow: Receipts and payments of cash during
the budget period. Only cash items are
considered in preparing cash budget.
Cash inflow consists of cash sales, receipt form debtors, sales of
assets, income from investment, issue of shares, loan notes, grants etc. Cash outflow consist of cash purchases, payment
to creditors, wages, dividends, tax, all expenses including capital expenditure.
Cash budget shows surplus or
deficiency of cash and this is an alarm for management to invest or raise finance.
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