Budget i

BudgetBudgetand Budgetary and Budgetary ControlControl

Why Corporates Do Why Corporates Do Budgeting?Budgeting?

Goals and Objectives

Budgets

Compels managersto think ahead

Aids managers in coordinating their efforts

Provides definite expectations that are the best framework to evaluate performance

Advantages of BudgetsAdvantages of Budgets

Types of BudgetsTypes of Budgets

Strategic Plan Long-Range Plan

Capital Budget Master Budget

Continuous Budget

Strategic PlanStrategic Plan

The most forward-looking budget is the The most forward-looking budget is the strategic plan, which sets the overall strategic plan, which sets the overall goals and objectives of the organization.goals and objectives of the organization.

Long-Range PlanLong-Range Plan

The strategic plan leads to long-range The strategic plan leads to long-range planning, which produces forecasted planning, which produces forecasted financial statements for five- to ten-year financial statements for five- to ten-year periods.periods.

Capital BudgetCapital Budget

Long-range plans…

are coordinated with capital budgets,which detail the planned expendituresfor facilities, equipment, new products,and other long-term investments.

Master Budget…Master Budget…

summarizes theplanned activitiesof all subunits ofan organization.

Sales

Production

Distribution

Finance

Operating Budget

Financial Budget

Master BudgetMaster Budget

PurchasesBudget____ ________ ________ ________ ________ ____

PurchasesBudget____ ________ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

Cost ofGoods SoldBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

OperatingExpensesBudget____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

BudgetedIncomeStatement____ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

SalesBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

InventoryBudget____ ________ ________ ________ ________ ____

Operating Budget

Components of Master Components of Master BudgetBudget

BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

BudgetedBalanceSheet_____ __________ __________ __________ __________ _____

CapitalBudget_____ __________ __________ __________ __________ _____

CapitalBudget_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

CashBudget

_____ __________ __________ __________ __________ _____

Components of Master Components of Master BudgetBudget

FinancialBudget

Operating BudgetOperating Budget

Sales Budget

Purchases Budget

Operating Expenses Budget

Cash collectionsfrom customers

Disbursements for purchases

Disbursements for operating expenses

Cash CollectionsCash Collections

It is easiest to prepare budgeted cash It is easiest to prepare budgeted cash collections at the same time as the sales collections at the same time as the sales budget.budget.

Cash collections include the current Cash collections include the current month’s cash sales plus the previous month’s cash sales plus the previous month’s credit sales.month’s credit sales.

Purchases BudgetPurchases Budget

Budgeted purchases = Desired ending inventory+ Cost of materials to be used for sales – Beginning inventory

Disbursements for Disbursements for PurchasesPurchases

For example, 50% of the current month’s For example, 50% of the current month’s purchases and 50% of the previous purchases and 50% of the previous month’s purchases may be included.month’s purchases may be included.

The total disbursements are then used in The total disbursements are then used in preparing the cash budget.preparing the cash budget.

Operating Expense Operating Expense BudgetBudget

Expenses driven by sales volume include Expenses driven by sales volume include sales commissions and many delivery sales commissions and many delivery expenses.expenses.

Operating Expense Operating Expense BudgetBudget

Other expenses are not influenced by Other expenses are not influenced by sales or other cost-driver activity and are sales or other cost-driver activity and are regarded as fixed, within appropriate regarded as fixed, within appropriate relevant ranges.relevant ranges.

Rent

Insurance

Depreciation

Salaries

Operating Expense Operating Expense DisbursementsDisbursements

Disbursements for Disbursements for operating operating expenses are expenses are based on the based on the operating expense operating expense budget.budget.

Operating Expense Operating Expense DisbursementsDisbursements

For example, 50% of last month’s and For example, 50% of last month’s and this month’s wages and commissions this month’s wages and commissions plus miscellaneous and rent expenses plus miscellaneous and rent expenses may be included.may be included.

The total of these disbursements is then The total of these disbursements is then used in preparing the cash budget.used in preparing the cash budget.

Budgeted Income Budgeted Income StatementStatement

The income statement will be completeafter addition of the interest expense,which is computed after the cash budgethas been prepared.

Budgeted Income Budgeted Income StatementStatement

Budgeted income from operationsis often a benchmark for judgingmanagement performance.