Budgeting

1
Budgeting

• Aims of budgeting
• Budgeting principles
• Mechanics of budgeting
• Types of budgets

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Budgeting

• A budget can be defined as
• A quantitative statement, for a defined period
  of time, which may include planned revenues,
  expenses, assets, liabilities and cash flows.
• CIMA Official Terminology

3
Focus

• A budget provides a focus for the organisation,
  aids the coordination of activities, and
  facilities control.

Budgeting can serve two aims  "The first
function is that of financial control (the
control of the financial resources of the
enterprise) and the second, that of management
control, the task of ensuring that the diverse
activities of different parts of the enterprise
are co-coordinated into a coherent
package." Otley 1987.
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Resources to be coordinated
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The Budget Hierarchy

• The master budget can be subdivided into
• Divisional
• Site
• Functional
• Departmental

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Budget Sequence

• Sales forecast
• Stocking requirement
• Production requirement
• Materials Requirement
• Support/facilities requirement
• Master Budget
• Cash Budget

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Budgeting Spreadsheets

• Pencil and reams of paper
• versus
• Excel spreadsheets

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The Mechanics of Budgeting

• Sales Budget
• Production Budget
• Materials Budget
• Labour Budget
• Overhead Budget

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Types of Budgets

• Fixed
• Flexible
• Activity based
• Rolling/Continuous

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Fixed Budget

• Defined as
• A budget which is normally set prior to the
  start of an accounting period, and which is not
  changed in response to subsequent changes in
  activity or costs/revenues.
• Fixed budgets are generally used for planning
  purposes.
• CIMA Official Terminology

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Flexible Budget

• Defined as
• A budget which, by recognising different cost
  behaviour patterns is designed to change as
  volume of activity changes.
• CIMA Official Terminology

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Activity Based Budgeting (ABB)

• Defined as
• A method of budgeting based on an activity
  framework and utilising cost driver data in the
  budget setting and variance feedback processes.
• CIMA Official Terminology

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The working of ABB

• Measurable activities
• Value of cost pools
• Quantities of costs per unit for each cost driver
• Standard consumption of cost drivers by each
  product.

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Aid to senior management

• Monitors quantity of cost drivers consumed
  therefore identification of efficiency
  improvements
• Monitor the size of activities cost pools
  therefore encouraging reduction in activity
  costs.

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Rolling/Continuous Budgets

• Defined as
• A budget continuously updated by adding a
  further accounting period (month or quarter) when
  the earliest accounting period has expired. Its
  uses is particularly beneficial where future
  costs and/or activities cannot be forecast
  accurately.
• CIMA Official Terminology

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