IPE 4439
Principles of Economics
and Cost Accounting
Course Teacher: Sharmin Akter Urmee
Lecturer, Department of MPE
Room No: 111, Old Academic Building
CHAPTER 9
BUDGETING
Budgeting Benefits
• Idea about required resources (number of
employees, equipment)
• Budgeted revenues and related expenses
(profit, cash inflows and outflows)
Definition of Budgeting
A budget is a detailed plan for the future that is typically
expressed in quantitative terms. The act of preparing a
budget is called budgeting. The use of budgets to control a
firm’s activities is known as budgetary control.
The master budget summarizes a company’s plans, setting
specific targets for sales, production, distribution,
administrative, and financing activities. It generally
culminates in a cash budget, a budgeted income statement,
and a budgeted balance sheet.
Budgets’ Dual Role: Planning and Control
• Planning involves developing objectives and preparing
various budgets to achieve these objectives.
• Control involves gathering feedback to assess the extent to
which the objectives developed at the planning stage are
being attained
Advantages of Budgeting
1. Budgets communicate management’s plans throughout the organization.
2. Budgets force managers to think about and plan for the future.
3. The budgeting process provides a means of allocating resources to those
parts of the organization where they can be used most effectively and are
most needed.
4. The budgeting process can uncover potential bottlenecks before they
occur
5. Budgets coordinate the activities of the entire organization by integrating
the plans of the various areas.
6. Budgets define goals and objectives that can serve as benchmarks for
evaluating subsequent actual performance.
Responsibility Accounting
A system of accountability in which managers are
held responsible for those items of revenue and cost
over which they can exert significant influence—and
only those items.
Managers are held responsible for differences
between budgeted and actual results.
Choosing a Budget Period
Continuous or perpetual budget
A 12-month budget that rolls forward one month (or quarter)
as the current month (or quarter) is completed.
Participative budget
A method of preparing budgets in which managers prepare
their own budget estimates. These budget estimates are then
reviewed by the manager’s supervisor, and any issues are
resolved by mutual agreement, leading to a completed
budget.
Advantages of Participative budgets
1. Individuals are recognized as members
2. more accurate and reliable
3. Motivation commitment to attaining the goal.
4. A manager who is not able to meet a budget
that has been imposed from above can always
say that the budget was unrealistic and
impossible to meet. With a participative
budget, this excuse is not available.
Budgetary slack
Budgetary slack
The difference between the revenues and expenses a
manager believes can actually be achieved and the amounts
included in the budget. Slack will exist when revenue budgets
are intentionally set below expected levels and expense
budgets are set above expected levels.
The Initial Flow of Budget Data in a Participative
Budgeting System
Preparing the Master Budget
1. A sales budget, including a schedule of expected cash collections.
2. A production budget.
3. A direct materials purchases budget, including a schedule of
expected cash disbursements for raw materials.
4. A direct labour budget.
5. A manufacturing overhead budget.
6. An ending finished goods inventory budget.
7. A selling and administrative expense budget.
8. A cash budget.
9. A budgeted income statement.
10. A budgeted balance sheet.
Preparing the Master Budget
Preparing the Master Budget
The Sales Budget
The Production Budget
The Direct Materials Purchases Budget
The Direct Materials Purchases Budget
The Direct Labour Budget
The Manufacturing Overhead Budget
The Ending Finished Goods Inventory Budget
The Selling and Administrative Expense Budget
The Cash Budget
The Cash Budget
The Cash Budget
The Budgeted Income Statement
The Budgeted Balance Sheet
Review Problem
Review Problem
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Review Problem
70*0.6 85*0.60
51*0.3
given
given
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