BUDGETING must justify a department’s entire budget

from a base of zero every period.

A Budget is a formal written statement of
management’s plans for a specified time period, o Life-cycle budget estimates a product’s
expressed in financial terms. revenues and expenses over its entire life
Th role of accounting during the budgeting process cycle beginning with research and
is to; development, proceeding through the
introduction and growth stages, into the
- Provide historical data on revenues, costs, maturity stage, and finally, into the harvest
and expenses or decline stage.
- Express management’s plans in financial
terms. o Kaizen budgeting assumes the continuous
- Prepare periodic budget reports improvement of products and processes,
usually by way of many small innovations
rather than major changes.
Benefits of budgeting
The primary benefits of budgeting are as follows: o The responsibility for coordinating the
✓ It requires all levels of management to plan preparation of the budget is assigned to a
ahead. budget committee. The budget committee
✓ It provides definite objectives for evaluating usually includes the president, treasurer,
performance chief accountant, and management
✓ It creates an early warning system for personnel from each major area of the
potential problems company.
✓ It facilitates the coordination of activities
within the business o Long- range planning involves the selection
✓ It results in greater management awareness of strategies to achieve long-term goals and
of the entity’s overall operations the development of policies and plans to
✓ It motivates personnel throughout the implement the strategies. Long range plans
organization. contain considerably less detail than
budgets.

Essentials of effective Budgeting

o In order to be effective management tools, The Master Budget
budgets must be based upon: o The master budget is a set of interrelated
• A sound organizational structure in budgets that constitutes a plan of action for
which authority and responsibility are a specified time period.
clearly defined.
• Research and analysis to determine the o Sales Budget: the starting point in preparing
feasibility of new products, services, and the master budget.
operating techniques.
• Management acceptance which is o Production budget: shows the units that
enhanced when all levels of must be produced to meet anticipated sales.
management participate in the ▪ Production requirements are
preparation of the budget, and the determined from the following
budget has the support of top formula:
management.
Budgeted Sales Units xx
o A continuous twelve-month budget result Desired ending finished goods units xx
from dropping the month just ended and Beginning Finished goods units (xx)
adding a future month Required Production Units xx

o Zero- based budgeting is a budget and

planning process in which each manager
o Direct Materials: show both the quantity The Flexible Budget
and cost of direct materials to be purchased.
o A flexible budget projects budget data for
▪ The quantities of direct materials
various levels of activity. In essence, the
are derived from the following
flexible budget is a series of static budgets at
formula:
different levels of activity
DM units required for production xx o Flexible budget reports are appropriate for
Desired ending DM units xx evaluating performance since both actual
Beginning DM units (xx) and budgeted costs are based on the actual
Required DM units to purchase xx activity level achieved
▪ The desired ending inventory is a key
component in the budgeting process;
Management by Exception
inadequate inventories could result
in temporary shutdowns of o Management by exception means that top
production. management’s review of a budget report is
focused either entirely or primarily on
o Direct labor: contains the quantity (hours) differences between actual results and
and cost of direct labor necessary to meet planned objectives.
production requirements. o For management by exception to be
▪ The direct labor budget is critical in effective, there must be guidelines for
maintaining a labor force that can identifying an exception. The usual criteria
meet the expected levels of are:
production. ▪ Materiality- usually expressed as a
percentage difference from budget.
o Manufacturing overhead: shows the ▪ Controllability of the item- exception
expected variable and fixed manufacturing guidelines are more restrictive for
overhead costs for the budget period. controllable items than for items the
manager cannot control.
o Selling and administrative expense: projects
anticipated selling and administrative
expenses as either variable or fixed. This
budget is also used in preparing the
budgeted income statement and the cash
budget.

o Budgeted Income statement: the important

end- product of the operating budgets.
▪ This budget indicates the expected
profitability of operations for the
budget period.
▪ The budgeted income statement
provides the basis for evaluating
company performance

o Cash Budget: shows anticipated cash flows.

▪ Because cash is so vital, this budget is
often considered to be the most
important financial budget.
▪ The cash budget contains three
section, (a) Cash receipts, (b) cash
disbursement and (c) financing.