BUDGETING

 A Budget is a detailed plan for future activities Expressed

in quantitative terms

 As a key component of planning, budgets are financial

plans for the future; they identify objectives and the
actions needed to be achieved.

 Budgets specifies how resources will be quantified and

used during a specified period of time.

 Budgets help management decide which activities it will

undertake and how the company's resources will be used.
 BUDGETS AS TOOL FOR PLANNING &
CONTROL
The main reasons why organizations make budgets:

a) Budgets forms the basis for planning what to do next.

Budgeting is done for planning, organizing, track, and improve the
financial situation.
b) By Controlling the spending, consistently saving and investing
a portion of income, a budget helps to stay on course in pursuit of
your long-term financial goals.
c) Since budgeting allows to create a spending plan for your
money, it ensures that you will always have enough money for the
things you need and the things that are important to you.
 BUDGETING EXPLAINED
The budgets used in business often include:

A sales or revenues budget; detailed by products or

services.

The Production budgets, budgets for each department in the

company, cash budget, capital expenditures budget etc.

The combination of all the budgets is referred to as the

company's Master Budget. The Master Budget consist of:
a) Operations Budget b) Financial Budget
 OPERATING BUDGET CONSISTS OF:

• Sales Estimates/Budget
• Production Budget
• Direct Material Budget
• Direct Labor Budget
• Overhead Budget
• Cost of Goods Sold Budget
• Selling and Admin. Budget
 FINANCIAL BUDGET CONSISTS OF:

• The Cash Budget

• The Budgeted Balance Sheet

• Capital Expenditure Budget

 STATIC BUDGET
A static budget forecasts revenue and expenses over a
specific period but remains unchanged even with changes
in business activity.

Budget of Rs. 5,000,000/- for a branch of a Courier

Company.

Static budgets are useful for keeping your production costs

in line. They are also useful to encourage your procurement
staff to obtain the goods and services you need at the
lowest possible price.
 FLEXIBLE BUDGET

A budget in which some amounts will increase or decrease when

the level of activity changes.
Cost Behavior
Fixed Costs:
Salaries & Rent Rs. 3,500,000

Variable Costs:
Rs. 30 x 50,000 Shipping Rs. 1,500,000
Total Rs. 5,000,000
 BUDGET PROCESS

Planning Control
 Strategic Plan
 Monitoring of Actual
Activity
 Long-Term Objectives
 Short-Term Objectives
 Short Term Plan
 Comparison of Actual
 Budgets with Planned
 Feedback  Investigation
STEPS IN PREPARATION OF BUDGETS
1. Understand Your Organization’s Goals: Before you compile your
budget, it’s important to have a firm understanding of the goals your
organization is working toward in the period covered by it. By understanding
those goals, you can prepare a budget that aligns with and facilitates them.
2. Estimate Your Income for the Period: To allocate funds for business
expenses, you first need to determine your income and cash flow for the
period to the best of your ability.
3. Identify Your Expenses: Once you understand your projected income
for the period, you need to estimate your expenses. This process involves
three main categories: fixed costs, variable expenses, and one-time expenses.
4. Determine Your Budget Surplus or Deficit: After you’ve accounted
for all your income and expenses, you can apply them to your budget. This is
where you determine whether you have enough projected income to cover all
your expenses.
 CAPACITY LEVELS
• Theoretical Capacity: 100% capacity at full
speed without interruptions.
• Practical Capacity: Theoretical capacity
with allowances of interruptions like
Sundays, repair work etc.
• Expected Actual Capacity: Short range
more defined usually seasoned.
• Normal Capacity: Average capacity
• Idle Capacity: Temporary Idleness of
Production due to lack of order.

• Excess Capacity: Greater productive

capacity than the company could ever hope to
use.
 EFFECTS OF VARIOUS CAPACITY
LEVELS ON PREDETERMINED FACORY
OVERHEAD RATES
ITEM NORMAL PRACTICAL THEORETICAL
CAPACITY CAPACITY
CAPACIT
Y
Percentage of Production 75% 85% 100%
Capacity
Direct Labor Hours 7,500 hrs. 8,500 hrs. 10,000 hrs.
Budgeted Factory Overhead
Fixed $ 12,000 $ 12,000 $ 12,000
Variable 6,000 6,800 8,000
Total $ 18,000 $ 18,800 $ 20,000
Fixed Factory Overhead Rate $ 1.60 $ 1.41 $ 1.20
Per Direct Labor Hour
Variable Factory Overhead Rate 0.80 0.80 0.80
Per Direct Labor Hour
 MACHINE REPAIR FOR A PRODUCING
DEPARTMENT
ACTIVITY LEVELS EXPENSE
DIRECT LABOR HOURS
High 6,840 hours 100% $ 2,776
Low 2,736 hours 40 % 1,750
Difference 4,104 hours 60% $ 1,026

Variable rate = $ 1,026 ÷ 4,104  $ 0.25 Per Direct Labor Hour

High Low
Total Expense $ 2,776 $ 1,750
Variable Expense ($ 0.25 Per Direct Labor 1,710 684
Hour)
Fixed Element $ 1,066 $ 1,066
FLEXIBLE
BUDGET
 BUDGETING PROFITS, SALES AND
COSTS
Example Problem # 1
The Harrison Company’s sales forecast for the next quarter, ending June 30,
indicates following:
Product Expected Sales In Units
Ceno 21,000
Nepo 37,500
Teno 54,300

Inventories at the beginning and desired quantities at the end of the quarter
are as follows:
Product March 31 June 30
Ceno 5,800 6,200
Nepo 10,600 10,500
Required: Teno 13,000 12,200

A Production Budget for the Second Quarter.

 SOLUTION TO PROBLEM: HARRISON
COMPANY

Production Budget
For QTR End’ June 30, 19xx
CENO NEPO TENO
Units Units Units
Desired Inventory June 30 6,200 10,500 12,200
Sales Forecasted 21,000 37,500 54,300
Total Required Units 27,200 48,000 66,500
Less: Beg’g Inventory April 1 5,800 10,600 13,000
Required Production 21,400 37,400 53,500
 BUDGETING PROFITS, SALES
AND COSTS
Example Problem # 2
Corvallis, Inc., employs 10 production workers, working 8 hours a day,
20 days per month, at a normal capacity of 2,400 units. The direct labor
wage rate is $ 6.30 per hour; direct materials are budgeted at $ 2.0 per
unit produced. Fixed factory overhead is
$960; supplies average $ 0.25 per direct labor hour; indirect labor is
1/6th of direct labor cost; and other charges are $ 0.45 per direct
labor hour.

Required:

The Flexible budget at 60%, 80% and 100% of normal capacity,

showing itemized manufacturing costs, total manufacturing cost, and
total manufacturing cost per unit.
 SOLUTION TO PROBLEM:
CORVALLIS INC.
100% 80% 60%
Capacity Capacity Capacity
Units 2,400 1,920 1,440
D.I. Hours (8hrs * 20days * 10wkrs) 1,600 hrs 1,280 hrs 960 hrs
D.I. Wage (6.3 / hr) 10,080 8,064 6,048
D. Material (2 / Unit) 4,800 3,840 2880
Fixed Over Head 960 960 960
Supplies (0.25 / D. L. hrs) 400 320 240
Indirect Labor Cost (1/6 of D.L.) 1,680 1,344 1008
Other Charges (0.45 per D.L. hr.) 720 576 432
Total Manufacturing Cost 18,640 15,104 11,568
Manufacturing Cost Per Unit 7.76 7.86 8.03
QUESTION
 Flexible Budget
50% ($) 60% ($) 75% ($) 90% ($) 100% ($)
(A)
Variable Expenses

Material 21,70,000 26,04,000 32,55,000 39,06,000 43,40,000

Labor 20,40,000 24,48,000 50,60,000 36,72,000 40,80,000

Other Expenses 7,90,000 9,48,000 11,85,000 14,22,000 15,80,000

Semi-variable Expenses

Maintenance and Repairs 3,50,000 3,50,000 3,85,000 4,20,000 4,20,000

Indirect labor 7,90,000 7,90,000 8,69,000 9,48,000 9,48,000

Sales Department Salaries 3,80,000 3,80,000 4,18,000 4,56,000 4,56,000

Sundry Expenses 2,80,000 2,80,000 3,08,000 3,36,000 3,36,000

Fixed Expenses
Wages and Salaries 9,50,000 9,50,000 9,50,000 9,50,000 9,50,000

Rent/Rates and Taxes 6,60,000 6,60,000 6,60,000 6,60,000 6,60,000

Depreciation 7,40,000 7,40,000 7,40,000 7,40,000 7,40,000

Sundry Admin 6,50,000 6,50,000 6,50,000 6,50,000 6,50,000

Total Cost (A) 98,00,000 108,00,000 124,00,000 141,60,000 152,60,000

Sales (B) 100,00,000 120,00,000 150,00,000 180,00,000 200,00,000

Profit (A - B) 2,00,000 12,00,000 25,20,000 38,40,000 47,40,000