1.

0 Introduction
A budget is one of the management tools which are used in carrying
out the activities of an organization. This topic will cover the origin and
meaning of budget, budgeting, basics of budgets including benefits of
budgets, types of budgets and budgeting process. It also illustrates the
preparation of a master budget and discusses on Zero-Based
Budgeting (ZBB).

2.0 The origin and meaning of budget and budgeting

The origin of the word ‘budget’ is the Latin ‘bulga’, meaning a little
pouch or knapsack, which may have come from a Gaulish source that
is related to the Irish word ‘bolg’ meaning ‘bag’. The word turned up in
English in the fifteenth century, having travelled via the French word
‘bougette’, meaning a ‘leather bag’.

The word’s financial connotations arose in the 18th century, the

original notion being that the government minister responsible for
treasury affairs opened his budget, or wallet, to reveal what fiscal
measures he had in mind.

A budget is defined as a plan quantified in monetary terms, prepared

and approved prior to a defined period of time usually showing
planned income to be generated and/or expenditure to be incurred
during that period and the capital to be employed to attain a given
objective.
Usually, a defined period of time which covers the budget is one year.
Thus, budgets are prepared on annual basis to meet the specified
objectives. The annual budget, therefore, clearly expresses what is to
be undertaken during the next year and authorizes the financial
resources that will be needed.

At a minimum, such a plan (budget) should contain information about

the types and amounts of proposed expenditures, the purposes for
which they are to be made and the proposed means of financing them.

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Budgeting is a range of activities of preparing budgets and managing
the finances. Modern formal budgets not only limit expenditures; but
also predict income, profits, and returns on investment a year ahead.

Budgets have evolved into tools of control and are also used as a
means of determining such rewards as profit-sharing and bonuses.
Unless the budgetary process is managed with extreme skill and care,
the very virtues of budgeting can turn into negatives - and have, of
late, emerged into a movement actively working to change this
process.

3.0 Budget administration

Budget administration requires the involvement of:
(1) Budget or Accounting Officer
(2) Budget Committee
(3) Budget Manual
4.0 A budget as a management tool
A budget is a management tool in the following respects:
 A budget involves managers in the budget process.
 The budget process can be used to assess whether activities are the
most effective means of achieving objectives.
 A budget is useful in assessing the cost effectiveness and cost
efficiency.
 Moving from the shopping list approach (starting from the costing of
inputs) to performance budgeting (planning the costs of targets and
activities linked to objectives).
 A budget enables managers to consider all expenditures (recurrent
and development) and resources at their disposal, i.e. Government
and donor.
 A budget enables planning for the service activities arising from
new investment.

5.0 Basic features of a budget

 A budget expresses a plan and resources needed to accomplish that
plan.
 A budget coordinates different activities in an organization, looks
forward and is basically expressed in monetary terms.

6.0 Benefits/purposes of a budget:

(1) Planning

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A budget forces the management to plan for the future very carefully
and specifies goals and activities to be carried out.

(2) Controlling
Targets set provide a benchmark (standard) by which the actual
performance may be measured. The issues of variance analysis and
investigation for the purpose of making correction come in here.

(3) Coordinating
A budget causes different parts of the organization to work together:
The production, finance, marketing, procurement and other
departments of an organization must work together in order to achieve
the goals and objectives of the organization.

(4) Communication
Intentions and goals of the management must be communicated to the
employees. The employees, therefore, become informed of what they
are supposed to do.

(5) Motivation
If employees are involved in the preparation of the budget, they
become motivated to implement it since they feel that it is theirs.
Where a budget promises rewards for reaching targets, employees
become motivated to achieve those targets.

(6) Basis of authorization and vehicle of implementation

A budget becomes a basis of authorization of expenditure. It also
becomes a reference for the activities performed.

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7.0 Types of budgets

(1) In a manufacturing concern

A master budget is the whole budget of an organization for a given
period. In a manufacturing concern, the master budget can be broken
down into the following elements:
(i) Operating budget

 Sales Budget
 Production Budget which can be further broken down into
Capital Budget, Material Purchases and Usage Budget,
Direct Labour Budget, Overhead Budget and Cost of Goods
Sold Budget.

(ii) Financial budget

Cash Budget
A cash budget is also known as cash flow forecast or statement of
projected cash flows. It is a statement showing the projected cash
movements during a given period. It consists of the following:
 Opening cash balance
 Projected cash inflows
 Projected cash outflows
 Closing cash balance

A cash budget includes all cash and cash equivalent items (cash in
hand, cash at bank, e.t.c.) but excludes all non-cash and non-cash
equivalent items like depreciation, debtors, bad debts and creditors.

A cash budget assists the organization to plan for its future cash
requirements and utilization by looking for funds during deficits and
investing the funds when there are surpluses. For example an
organization can borrow money from a bank when there is a deficit and
can invest the money in a project when there is a surplus.

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 A cash budget involves careful anticipation of all sources and
expenditure of cash during a considered period

Budgeted Statement of Income

It is also known as a proforma statement of income. This statement
shows the expected income, expenses and resulting profit or loss
during the accounting period (financial year).

Budgeted Statement of Financial Position

It is also known as a proforma statement of financial position. This
statement shows the expected financial position at the end of the
accounting period (financial year). It shows assets on one hand and
liabilities and owner’s equity on the other hand.

Diagrammatically, this can be shown as follows:

MASTER BUDGET

OPERATING BUDGET FINANCIAL BUDGET

SALES BUDGET PRODUCTION CASH BUDGETED BUDGETED

BUDGET BUDGET STATEMENT STATEMENT OF
OF INCOME FINANCIAL
POSITION
 Capital
 Materials purchases
 Materials usage
 Direct labour
 Overheads
 Cost of goods sold

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 (2) In a service organization (not under Government control)
The cost of a service will comprise:
 Direct labour cost
 Direct materials
 Overheads

e.g. audit and legal services involve the work of professionals and we
need to know the number of professional hours spent on a task. In
order to get the total direct labour cost, the number of professional
hours spent on a task is multiplied by the established rate per hour.

Direct materials will be largely the stationery. The overheads will have
to be determined on a selected basis e.g. labour.

(3) In non-profit organizations

A good example of non-profit organizations is the Government. Non-
profit organizations are concerned with revenue and expenditure. In
the Government, the Expenditure Master Budget can be broken down
into Recurrent Expenditure Budget and Development Expenditure
Budget as follows:

EXPENDITURE MASTER BUDGET

RECURRENT EXPENDITURE DEVELOPMENT EXPENDITURE

BUDGET BUDGET

PERSONAL OTHER CHARGES

EMOLUMENTS BUDGET
BUDGET

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Development budget
This budget intends to meet development expenditure. This is
especially applicable in government budgeting.

Recurrent budget
This budget intends to meet recurrent expenditure. This is especially
applicable in government budgeting.

Medium Term Expenditure Framework (MTEF) budget

MTEF budgeting system is currently applied by the government. The
objective of the government is not to make profit but to render
services to its citizens.

The budget is mainly concerned with collection and expenditure of

revenue. Each objective must be SMART (Specific, Measurable,
Achievable/Attainable, Realistic and Time-bound). Also, there is a need
for objectives to be gender sensitive.

8.0 Stages in developing a master budget

(1) Setting main objectives

This stage deals with the identification of the general direction which
should be followed throughout the budgeting process. The objectives
must be in harmony with the organizational global objectives.

(2) Identifying constraints

Constraints such as shortage of funds and raw materials should be
identified so that solutions can be planned beforehand.

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(3) Obtaining plans and estimates from budget centres
Plans from budget centres of the organization should be obtained.
(4) Examining, discussing and coordinating plans and
estimates based on the objectives of each budget centre
Before aggregating the plans and estimates based on the objectives of
each centre, they should be discussed and agreed by the
management.

(5) Aggregating plans to a draft budget

This involves consolidating the plans and estimates of individual
centres into organizational plans and estimates.

(6) Accepting and approving the budget

In parastatal organizations, various levels are involved in accepting
and approving the budget:
(i) The management
(ii) The workers
(iii) The Board of Directors (Governing Board) – Gives final approval

9.0 Zero-Based Budgeting (ZBB)

ZBB is also known as ‘Priority-Based Budgeting’. This
budgeting system emerged in the 1960s as an attempt to
overcome the limitations of incremental budgets.

ZBB requires that all activities be justified and prioritized

before decisions are taken relating to the amount of
resources allocated to each activity.

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The focus is on programmes or activities instead of
functional departments based on the line-items which is a
feature of traditional budgeting. ZBB works from the
premises that projected expenditure for the existing
programmes should start from the base zero, with each
year’s budget being compiled as if the programmes were
being launched for the first time.
The budgeters must present their requirements for
appropriations in such a way that all funds can be allocated
on the basis of cost-benefit or some similar kind of
evaluation analysis.

ZBB involves three stages:

(1) Describing each organizational activity in a decision
package.
(2) Evaluating and ranking the decision packages in order
of priority.
(3) Allocating resources based on order of priority up to
the spending cut-off level.

The advantages of ZBB over the traditional methods of

budgeting are claimed to be as follows:
(1) Traditional budgets tend to extrapolate the past by
adding a
percentage increase to the current year. ZBB avoids the
deficiencies of

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 such incremental budgeting and represents a move
towards the
allocation of resources by need or benefit.

Thus, unlike the traditional budgeting, the level of funding

is not
taken for granted.

(2) ZBB creates a questioning attitude rather than one that

assumes that current practice represents value for money.

(3) ZBB focuses attention on outputs in relation to value for

money.

ZBB was first applied in Texas Instruments in 1969. It

quickly became one of the fashionable management tools of
the 1970s.
During the 1970s, many articles on ZBB were published.
However, ZBB has never achieved the widespread adoption
that its proponents envisaged.

Research suggests that many organizations tend to

approximate the principles of ZBB rather than applying
them fully throughout the organization as outlined in the
literature. Still, in some situations, priority-based-
incremental budgeting needs to be applied. Priority

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incremental budgets thus represent an economical comprise
between ZBB and incremental budgeting.

Illustration

Mandevu Furniture Factory (MFF) is involved in the manufacture of

highly favoured tables. Tables manufactured are of two types: Normal
tables and Executive tables. The financial year of MFF follows a
calendar year. The factory has provided the following data for
preparation of its 2019 master budget:

Direct materials:
Particle Board TZS 5,000 per board foot
Red Oak Board TZS 8,000 per board foot

Direct manufacturing labour: TZS 10,000 per direct labour hour.

Factory overheads are applied on the basis of direct labour hours.

Normal table Executive table

Contents of each
finished table:
Particle Board 10 board feet 10 board feet
Red Oak Board 4 board feet 6 board feet
Direct labour 12 hours 18 hours

The statement of financial position as at 31st December, 2016 is given

below:

MANDEVU FURNITURE FACTORY (MFF)

BALANCE SHEET AS 31ST DECEMBER, 2018

TZS 000s TZS 000s TZS 000s

Assets

Non-current assets
Land 50,000
Buildings and equipment 380,000

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Less: Accumulated depreciation 75,000 305,000 355,000

Current assets
Cash 10,000
Accounts receivable 34,650
Stock of materials 11,200
Stock of finished tables 12,630 68,480
Total assets 423,480

Owners’ equity and liabilities

Owners’ equity
Share capital 300,000
Retained profits 60,280 360,280

CURRENT LIABILITIES
Accounts payable 58,200
Income tax payable 5,000 63,200
Total owners’ equity and liabilities 423,480

The following is additional information regarding the year 2019:

(1) For finished tables:

Normal tables Executive
tables
Expected number of tables to be sold 5,000 1,000
Selling price per table (TZS) 400,000 560,000
Desired ending inventory (tables) 1,100 50
Beginning inventory (tables) 100 50
(2) For direct materials (board):
Particle Board Red Oak
Board
Beginning inventory (board feet) 4,000 3,000
Desired ending inventory (board feet) 6,000 1,000

(3) At anticipated production levels, factory overheads totaling TZS

270,000,000 are expected to be incurred. The amount includes
depreciation of TZS 25,000,000 for buildings and equipment.

(4) Selling and administration expenses are expected to be TZS

180,000,000.

(5) Income tax is charged at 30% on net profit.

(6) The budgeted cash flows for the four quarters of 2017 are as
follows:

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 Quarter Quarter Quarter Quarter
1 2 3 4
TZS TZS TZS TZS
000s 000s 000s
000s
Cash Inflows:
Cash collections from
customers 125,000 150,000 160,000 221,000
Bank loan 40,000 - - -

Cash Outflows:
Payment for:
Direct materials 20,000 35,000 35,000 54,200
Payroll 90,000 95,000 95,000 109,200
Other costs and
expenses 25,000 20,000 20,000 17,000
Income taxes 15,000 - - -
Purchase of machinery - - 20,000 -
Bank loan
(Partial payment) - - - 24,000

(7) Work-In-Progress is negligible and may be ignored.

Required:
Prepare a master budget for the year 2019 for MFF. Include the
following detailed schedules:
(a) Sales budget
(b) Production budget in units
(c) Direct material purchase budget in units and TZS
(d) Direct labour budget
(e) Factory overhead budget
(f) Ending inventory budget of both direct materials and finished
goods in units and TZS
(g) Cost of goods sold budget
(h) Budgeted Statement of Income for year ending 31 st December,
2017.
(i) Cash budget by quarters. Include a total column for the four
quarters
(j) Budgeted Statement of Financial Position as at 31 st December,
2017 (Show workings)

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Solution:

(a) Sales budget (Schedule 1)

Number Selling
of tables Price Total
Per table
TZS TZS
Executive table 1,000 560,000 560,000,000
Normal tables 5,000 400,000 2,000,000,000
2,560,000,000

(b) Production budget (Schedule 2)

Number of Number
of
Executive tables Normal tables

Required for sale 1,000 5,000

Required for ending inventory 50 1,100
1,050 6,100
Less opening inventory 50 100
Quantity to be produced 1,000 6,000

(c) Direct material purchase budget (Schedule 3)

Particle board Red oak board
(Feet) (Feet)
Total
TZS
Required for production of:

1,000 Executive tables 10,000 6,000

6,000 Normal tables 60,000 24,000

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 70,000 30,000
Add desired closing inventory 6,000 1,000
Total to be available 76,000 31,000

Less opening inventory 4,000 3,000

Quantity to be purchased 72,000 28,000
Price per board foot, TZS x 5,000 x 8,000
Total purchases, TZS 360,000,000 224,000,000
584,000,000

(d) Direct labour budget (Schedule 4)

Executive tables Normal tables Total

TZS
Production (tables) 1,000 6,000

Direct labour hours per table 18 12

Total direct labours 18,000 72,000

Rate per direct labour hour

(TZS) 10,000 10,000
Total direct labour
costs, TZS 180,000,000 720,000,000 900,000,000

(e) Factory overhead budget (Schedule 5)

Factory overheard absorption

Rate = TZS 270,000,000
90,000 direct labour hours

= TZS 3,000 per direct labour hour

Executive tables Normal tables

Total

Total direct labour hours 18,000 72,000

90,000

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Factory overheard per
direct labour hour, TZS 3,000 3,000 3,000

Total factory
overheads, TZS 54,000,000 216,000,000
270,000,000

(f) Ending inventory budget (Schedule 6)

Feet Price
per Total
foot TZS
TZS
Raw materials

Particle board 6,000 5,000 30,000,000

Read oak board 1,000 8,000 8,000,000
38,000,000

Finished tables
Number of tables Cost per table
Total
TZS TZS

Executive tables 50 332,000* 16,600,000

Normal tables 1,100 238,000** 261,800,000
278,400,000

Calculation of cost per table:

Executive table Normal table

Particle board 50,000 50,000

Red oak board 48,000 32,000
Direct labour 180,000 120,000
Factory overheads 54,000 36,000
332,000* 238,000**

(g) Cost of goods sold budget (Schedule 7)

TZS
000s

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Opening finished goods 12,630

Cost of goods manufactured:

Raw materials
Opening stock 11,200
Purchases (Schedule 3) 584,000
595,200
Closing stock (Schedule 6) 38,000 557,200
Direct labour (Schedule 4) 900,000
Factory overheads (Schedule 5) 270,000 1,727,200
1,739,830

Less closing finished goods (Schedule 6) 278,400

Cost of goods sold 1,461,430

(h) Budgeted Statement of Income for the year ending 31st

December, 2017 (Schedule 8)
TZS

Sales (Schedule 1) 2,560,000,000

Cost of goods sold (Schedule 7) (1,461,430,000)
Gross Profit 1,098,570,000
Selling and Admin. (180,000,000)
Profit 918,570,000
30% corporation tax 275,571,000
Profit after tax 642,999,000

(i) Cash budget for the year ending 31st December, 2017
(Schedule 9)
Description Q1 Q2 Q3 Q4 Total
TZS TZS TZS TZS TZS

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 000s 000s 000s 000s
000s

Opening balance 10,000 25,000 25,000 15,000 10,000

Cash inflows:
Collection from
Customers 125,000 150,000 160,000 221,000 656,000
Bank loan 40,000 - - 40,000
Total cash inflows 165,000 150,000 160,000 221,000
696,000
Total cash available
(A) 175,000 175,000 185,000 236,000 706,000

Cash outflows:
Payment for:
Direct materials 20,000 35,000 35,000 54,200 144,200
Payroll 90,000 95,000 95,000 109,200 389,200
Others costs
and expenses 25,000 20,000 20,000 17,000 82,000
Income Tax 15,000 - - - 15,000
Purchase of
machinery - - 20,000 - 20,000
Bank loan - - - 24,000 24,000
Total cash
Outflows (B) 150,000 150,000 170,000 204,400 674,400

Closing balance
= (A) – (B) 25,000 25,000 15,000 31,600
31,600

(j) Budget Statement of Financial Position at 31st December,

2017
(Schedule 10)
TZS TZS TZS
000s 000s 000s
Assets
Non- current Assets
Land 50,000
Building & equipment 400,000
Depreciation (100,000) 300,000 350, 000

Current assets
Stock of raw materials 38,000
Stock of finished tables 278,400
Accounts Receivable (W1) 1,938,650
Cash (Schedule 9) 31,600 2,286,650

Total assets 2,636,650

Owners’ equity and liabilities

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Share capital 300,000
Retained Earnings (W2) 703,279 1,003,279

Current liabilities

Accounts payable (W3) 1,351,800

Income Tax payable (W4) 265,571
Bank Loan (W5) 16,000 1,633,371
Total owners’ equity and liabilities 2,636,650

WORKINGS:
TZS
W 1: Accounts Receivable
Opening balance 34,650,000
Add sales 2,560,000,000
2,594,650,000
Less cash receipts 656,000,000
Closing balance 1,938,650,000

W 2: Retained Earnings
Opening balance 60,280,000
Add current year retained earnings 642,999,000
Closing balance 703,279,000

W 3: Accounts payable
Opening balance 58,200,000

Add:
Purchases 584,000,000
Labour 900,000,000
Factory Overheads
(Except depreciation) 245,000,000
Selling & Admin. 180,000,000 1,909,000,000
1,967,200,000

Less payments:
(Except Income tax,
purchase of machinery
and bank loan) 615,400,000
Closing balance 1,351,800,000

W 4: Income tax payable

Opening balance 5,000,000
Charge for the year 275,571,000
280,571,000
Less payment 15,000,000
Closing balance 265,571,000

W 5: Bank Loan
Amount received 40,000,000
Less payment 24,000,000

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 Closing balance 16,000,000

10.0 Conclusion
A budget is defined as plan quantified in monetary terms, prepared
and approved prior to a defined period of time usually showing planned
income to be generated and/or expenditure to be incurred during that
period and the capital to be employed to attain a given objective.
Budget administration involves the budget or Accounting Officer,
budget committee and application of a budget manual. A budget is a
management tool since it involves managers and measures
effectiveness and efficiency of operations. The basic features of a
budget are that a budget expresses a plan and resources needed to
accomplish that plan and coordinates different activities in an
organization, looks forward and is basically expressed in monetary
terms. A budget also acts as a tool for planning, controlling,
communicating, motivating and basis of implementation and
authorization. There are several types of budgets in manufacturing and
service organizations and government.

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