• Budget (annual profit plan) is a realistic financial plan for the future

• Budget used in different purposes" Planning tool, control tool,

communication tool, motivation tool

• Planning tool:

▪ A budget represents a written plan for the future

▪ It forces management to evaluate their assumptions and

objectives during the budgetary process.

▪ A firm without clear goals may not able to make effective

decisions, Having a goal in the form of a budget helps the firm
plan strategically and make sound decisions

▪ Companies that prepare budgets can anticipate and mitigate

future problems before they occur, Example: If a company
anticipates running out of critical raw material, it can take steps to
prevent shortages, Without this foresight, the company might face
shutdowns or incur high costs for expedited shipments.

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Created by: Mohamed Zakaria
 • Control tool:

▪ Budgets Provide cost guidelines ( ‫ (حدود للصرف‬this guidelines help

organizations to reveal efficient & inefficient of use company
resource

▪ Managers are less likely to spend on unnecessary items if they

know their expenses will be compared with the budget

▪ Budgets help measure the performance of effective managers by

revealing their ability to manage costs within set limits

▪ Managers can use budgets to assess their own performance

▪ For a budget to be an effective control tool, it must be integrated

with the organization’s accounting system and structure, This
integration ensures accurate data transmission and assigns
variances (differences between actual and budgeted
performance) to the appropriate organizational units.

• Motivational tool:

▪ For a budget to be effective as a Motivational tool, it needs to be

realistic and achievable

▪ When employees are involved in the budgeting process, they are

more likely to be motivated to stay within the budget

▪ By allowing some flexibility within the budget, employees feel

motivated as They understand that their ideas and suggestions
are valued

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 • Communication tool:

▪ The budget communicating the firm's goals to all employees

▪ Budget lead to something called goal congruence which mean all

employees at different departments will work to achieve same
goal

▪ Budget help to coordination between departments by ensures

that the objectives of different departments are aligned with each
other and with the overall organizational goals.

▪ Example: if there is no budget specifics the amount of inventory

level, The sales department may prioritize high inventory levels to
avoid losing sales, while the treasury department may want to
minimize inventory to conserve cash.

• The Budget as a Formal Quantification of Management's Plans

▪ Corporations have goals for market share, profitability, growth,

dividend payout, etc. Not-for-profit organizations also have goals,
such as increased number of free meals served, lowered
recidivism rate among offenders, etc., these goals cannot be
achieved without careful planning about the allocation of
resources and the expected results.

▪ Organizations need to carefully consider how they will use their

available resources (money, people, time, etc.) to achieve their
goals, & How much of each resource (money, materials, labor) will
be used to achieve the goals, this will achieve by setting budget

▪ Expected Outcomes What results are anticipated from the use of

these resources

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 • budget process

▪ 1st Setting objectives: short term & long-term objectives

▪ 2nd setting plans that help company to achieve these objectives

▪ 3rd identify resource needed to achieve plans: setting budget

means converting plans into numbers about resource allocation
needed to achieve goals & expectations of outcome about using
resources
▪ 4th performance evaluation by Comparing actual results to the
budget allows for

• Participation in budget process

▪ board of directors formulated mission statement

▪ Senior management translates the mission statement into a

strategic plan

▪ Budget Committee/Department:

✓ Drafting the budget calendar: list of dates specify the start

date & end date of each department budget, this schedule
of activities help to adopting & developing budget in time as
departmental budget depend in each others

✓ Preparing the budget manual: providing guidelines,

instructions, and templates for departmental budgets

✓ Reviewing and approving the departmental budgets

submitted by operating managers

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 ✓ Compiling the overall budget from the departmental
budgets & Managing Budget Process

▪ Middle and lower management are actively involved in the

budget process They Receive budget instructions and guidelines
& start to preparing their budget

• Types of budgets
Top-Down (authoritative) Budget Bottom-Up (Participative) Budget
• This type of Budget created by • This type of budget created by all
outside consultant hired by top departments after the top
Management management specifying
organization goals
Advantages:
• Ensures consistency across all Advantages
functional areas: Top-down • Encourages employees to have a
budgeting ensures that all sense of ownership of the output
departments and units within the of the process, resulting in
organization are aligned with the acceptance of, and commitment
overall strategic goals and to, objectives expressed in the
objectives budget

• Is far less complex and time- • Enables employees to relate

consuming: Coordinating input performance to rewards or
from multiple departments and penalties
levels of management can be a
time-consuming and complex • Provides a broader information
process base: Middle and lower-level
managers often have a better
Disadvantages: understanding of the day-to-day
• Consultant will not fully operations of the business
understanding the company
process Disadvantages
• Higher costs in time and money
• Employee that will not involved
react negatively • Creating budgetary slack

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 • Impairment goal congruence • Quality of participation is
affected by the objectives,
values, beliefs, and expectations
of those involved: The
effectiveness of bottom-up
budgeting can be influenced by
the attitudes and motivations of
the employees involved. If
employees are not fully engaged
or if there are conflicts of
interest, the process may not be
as effective.

Budgetary slack

• Managers may intentionally create budgetary slack to make their

performance look better, If they underestimate revenue or overestimate
expenses, they are more likely to meet or exceed their budget targets

Time Frames of Budgets

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Characteristics of successful budget

▪ Sufficient lead time the good budget must be finalized at the

beginning of the fiscal year, so the lead time is critical factor,
some opinions see that the budget to end at the beginning of the
fiscal year it must be start preparing in September to finished in
first of December

▪ Budget manual all employees that involve in budget process

must be know all instructions “distribution of instructions”

▪ Acceptance at all levels

▪ Top management support

Budget considered the effect on external factors

• Economic Conditions:
▪ The overall economic environment plays a crucial role. Factors
like economic growth, inflation, interest rates, and consumer
spending directly influence a company's revenue and profitability

▪ For example, if the economy is slowing down, a manufacturer

might expect lower sales and adjust its budget accordingly.

• Industry conditions:
▪ Market Share: A company's position in the market (e.g., market
leader, niche player) will determine its strategies and budget
allocation.

▪ Regulations: Government regulations (e.g., environmental,

safety, labor) can impact costs and operations, requiring
adjustments to the budget.

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 ▪ Labor Market: Availability of skilled labor, wage rates, and labor
regulations can affect a company's budget

▪ Competitor Activity: The actions of competitors (pricing, product

launches, marketing campaigns) can impact a company's market
share and profitability, necessitating adjustments to the budget.

▪ Example: If input costs (e.g., raw materials, energy) are rising, a

company will need to factor in higher production costs when
budgeting, potentially impacting profit margins.

Criticism & Limitation of budget

1. Makes across-the-board cuts when early budget iterations show that

planned expenses are too high “departmental managers negative
react as they see that the budget is to low”

2. Overemphasizes a fixed time horizon, such as one year

3. Is not used until the end of the budget period to evaluate performance

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Standard cost

• predetermined expectations about the cost of a unit of input, output, or

activity

• using standard cost in budget to alert management when there is a

significant variance between actual costs and standard costs

• Standard costs are not just averages of past costs, but it estimated about
what cost should be based on Accounting studies (select appropriate
methods that will used in expectation), Engineering studies (Evaluating
production processes, materials, and labor efficiency to calculate optimal
costs) & Statistical quality control studies (to create expectations about
spoilage)

Developing standard cost

1. Making activity analysis to identifies, and evaluates the activities

needed to produce a particular output, this steps will help us to
determine the resources “Materials, labor, Time spend,…” involve
to produce product in order to create expectations about cost

2. Historical Data Companies that cannot perform detailed activity

analysis often use historical data to set standards

3. Direct Materials A critical component of standard costs is

deciding the type and quality of materials

4. Direct labor the complexity of the production process (high

complex will need skilled labor) and the restrictions on pay scales
imposed by union agreements have the most impact on
formulating cost standards

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Idel vs practical standards

• Idel standard (Theorical): Standard cost is setting under optimal

conditions “No waste, No downtime, No holidays,…”

• Practical standards: Standard cost setting under the normal

conditions which allow spoilage, holidays, downtime,…”

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Master budget

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Budget methodologies

Project Budget:

• A project budget is a comprehensive plan that outlines all the expected

costs associated with a particular project, Examples: opening new
store, New Product line, develop new web site

• Projects typically need resources from various departments within the

organization, This could include Design, Engineering, Production,
Marketing, Accounting, Human Resources

• Example on Project Budget:

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Activity based budgeting

• the traditional budget the overhead will be allocated by using single

cost pool & single allocation base

• Activity based Budgeting the overhead will be allocated by using

multiple cost pool & multiple allocation base

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Zero Based Budgeting
• Incremental Budgeting: In this traditional approach, the current year's
budget is used as a starting point for the next year's budget,
Adjustments are made to account for anticipated changes, such as
inflation, new projects, or reduced spending, the advantage of
incremental budget that is take less time & more simpler

• Zero-Based Budgeting (ZBB): required manager to start budget from

zero base each budget cycle, Zero-based budgeting is a rigorous
budgeting approach that requires managers to justify every expense
annually, While it can lead to significant cost savings by eliminating
some unnecessary costs, disadvantages take more time & more
complex

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Continuous or rolling budget

• This budgeting method involves a continuous revised of the budget on a

regular basis, Instead of creating a static budget for a fixed period (like a
year), a rolling budget is constantly updated as new information and
data become available

Advantages
• Management is always thinking ahead
Disadvantages
• Amount of time the manager must spend on budget preparation

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