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accounting

1. ACC 222: COST AND MANAGEMENT ACCOUNTING II BUDGETING

2. INTRODUCTION Management accounting can assist managers in making decisions The actions that follow managerial decisions normally involve several aspects of the business such as marketing , production , purchasing and finance functions. It is important that management should coordinate these various interrelated aspects of decision making. 2 Certificates

3. INTRODUCTION CONT…. If they fail to do this, there is a danger that managers may each make decisions that they believe are in the best interests of the organization when, in fact, taken together they are not. The various activities of a company should be coordinated by the preparation of plans of actions for future periods These detailed plans are usually referred to as budgets . 3

4. BUDGETING A budget is defined as: A plan quantified in monetary terms , prepared and approved prior to a defined period of time usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective . The act of preparing a budget is called budgeting . The use of budgets to control a firm’s activities is known as budgetary control.

5. BUDGET CONT. Usually, a defined period of time which covers the budget is one year. Thus, budgets are prepared on annual basis to meet the specified objectives. The annual budget, therefore, clearly expresses what is to be undertaken during the next year and authorizes the financial resources that will be needed. The preparation of the budget should be a “bottom-up” process. Budget should originate at the lowest levels of management and be refined and coordinated at higher levels. This approach enables managers in the preparation of their budgets and increases the probability that they will accept the budget and strive to achieve the budget targets. 5

6. BENEFITS/PURPOSES OF A BUDGET: Planning A budget forces the management to plan for the future very carefully and specifies goals and activities to be carried out . Controlling Targets set provide a benchmark (standard) by which the actual performance may be measured. The issues of variance analysis and investigation for the purpose of making correction come in here.

7. BENEFITS/PURPOSES OF A BUDGET (CONTINUED): Coordinating A budget causes different parts of the organization to work together: The production , finance , marketing , procurement and other departments of an organization must work together in order to achieve the goals and objectives of the organization

8. Communication Intentions and goals of the management must be communicated to the employees . The employees, therefore, become informed of what they are supposed to do.

9. BENEFITS/PURPOSES OF A BUDGET (CONTINUED): Motivation If employees are involved in the preparation of the budget, they become motivated to implement it since they feel that it is theirs. Where a budget promises rewards for reaching targets, employees become motivated to achieve those targets.

10. BENEFITS/PURPOSES OF A BUDGET (CONTINUED): Vehicle of implementation A budget becomes a basis of authorization of expenditure. It also becomes a reference for the activities performed.

11. PREREQUISITES FOR THE SUCCESS OF A BUDGET   - Top management support Efficient communication channels There should be interactive communication: Top-down Down-top Horizontal Team work and participation

12. PREREQUISITES FOR THE SUCCESS OF A BUDGET (CONTINUED)   Existence of a well designed organization structure: To simplify communication. To create responsibility centres: Cost centres Revenue or profit centres Investment centres Existence of proper evaluation mechanism Clear and realistic objectives

13. PREREQUISITES FOR THE SUCCESS OF A BUDGET (CONTINUED): Flexibility in the budgeting system Expertise in budgeting and computing facilities Presence of an effective data gathering system There can be an effective data gathering system as a result of: Proper accounting system Statistical services Computer services to generate, analyze, store and retrieve required data

14. BUDGETING PROCESS Budgeting is the formal procedure of preparing budgets. It involves the following basic steps: Identifying expenses Determining different sources of income Establishing the budget period Allocating income for expenses Monitoring the efficiency of the budget

15. MASTER BUDGET The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate affect other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets .

16. MASTER BUDGET INTERRELATIONSHIP

17. COMPONENTS AND PREPARATION OF A MASTER BUDGET: Following are the major components or parts of master budget. Sales budget Production budget Material budget/direct material budget Labor Budget Manufacturing Overhead Budget Ending Finished Goods Inventory Budget Selling and Administrative Expense Budget Cash budget Budgeted Income Statement Budgeted Balance Sheet

18. MASTER BUDGET PREPARATION A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. The sales budget will help determine how many units will have to be produced. Thus, the production budget is prepared after the sales budget.

19. EXAMPLE OR SAMPLE OF A SALES BUDGET : Following is the sales budget of ABC Ltd.

20. EXAMPLE CONT………… Schedule of Expected cash collections

21. PRODUCTION BUDGET The production budget is prepared after the sales budgets. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Production needs can be determined as follows.   Budgeted sales in units XXXX Add desired ending inventory…………………… XXXX Total need………………………………………… XXXX less beginning inventory……………………… XXXX Required production…………………………… XXXX

22. EXAMPLE OF A PRODUCTION BUDGET :

23. MATERIAL BUDGET Direct materials budget is prepared after computing production requirements by preparing a production budget. Direct materials budget or materials budgeting details the raw materials that must be purchased to fulfill the production requirements and to provide for adequate inventories. The required purchases of raw materials are computed as follows: Raw material required to meet the production schedule…………..XXXX Add desired ending inventory of raw materials …………………… XXXX Total raw materials needs………………………………………… XXXX Less beginning inventory of raw material………………………… XXXX Raw materials to be purchased…………………… …………… XXXX

24. EXAMPLE OF DIRECT MATERIALS BUDGET:

25. EXAMPLE OF DIRECT MATERIAL CONT…………

26. EXAMPLE CONT.………..

27. DIRECT LABOR BUDGET The direct labor budget is developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available  to meet the budgeted production needs. By knowing in advance how much labor will be needed throughout the budget year, the company can develop plans to adjust the labor force as situation requires.

28. EXAMPLE OF DIRECT LABOR BUDGET

29. MANUFACTURING OVERHEAD BUDGET   The manufacturing overhead budget provides a schedule for all costs of production other than direct materials and direct labor. It show the expected manufacturing overhead costs for the budget period. Overhead costs of production are differentiated as to their underlying behaviour pattern as being either fixed or variable. Therefore the cost per unit of production of each variable cost item is multiplied by the quantity of units produced. Fixed costs remain relatively constant.

30. EXAMPLE OF A MANUFACTURING OVERHEAD BUDGET:

31. ENDING FINISHED GOODS INVENTORY BUDGET After preparing sales budget , Production budget , direct material budget , direct labor budget , and manufacturing overhead budget the management has all the data needed to calculate unit product cost . This calculation is needed for two reasons: first, to determine cost of good sold on the Budgeted income statement ; and second, to know what amount to put on the balance sheet inventory account for unsold units . The carrying cost  of unsold units is calculated on the ending inventory finished goods budget.

32. ENDING FINISHED GOODS INVENTORY BUDGET

33. SELLING AND ADMINISTRATION EXPENSE BUDGET Selling and administrative expense budget lists the budgeted expenses for areas other than manufacturing. In large organizations this budget would be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses. For example, the marketing manager in a large organization would submit a budget detailing the advertising expenses for each budget period.

34. EXAMPLE OF SELLING AND ADMINISTRATIVE

35. CASH BUDGET Cash budget is a detailed plan showing how cash resources will be acquired and used over some specific time period. Cash budget is composed of four major sections . The receipts section. The disbursements section The cash excess or deficiency section The financing section

36. CASH BUDGET CONT.……….. The cash receipts section consists of a listing of all of the cash inflows, except for financing, expected during the budgeting period. Generally, the major source of receipts will be from sales.

37. CASH BUDGET CONT… The disbursement section consists of all cash payment that are planned for the budgeted period. These payments will include Raw material purchases, direct labor payments, manufacturing overhead costs, and so on as contained in their respective budgets. In addition, other cash disbursements such as equipment purchase, dividends, and other cash withdrawals by owners are listed.

38. CASH BUDGET CONT.………… The cash excess or deficiency section is computed as follows:

39. EXAMPLE OF CASH BUDGET The following are additional data provided. The beginning cash balance is $42,500 Management plans to spend $130,000 during the year on equipment purchases: $50,000 in the first quarter; $40,000 in the second quarter; $20,000 in the third quarter; $20,000 in the fourth quarter. The board of directors has approved cash dividends of $8,000 per quarter. Management would like to have a cash balance of at least $40,000 at the beginning of each quarter for contingencies.

40. EXAMPLE CONT.….. The company require a minimum balance of $ 40,000. Assume ABC Ltd. will be able to get agreement from a bank for an open line of credit. This would enable the company to borrow at an interest rate of 10% per year. All borrowings and repayments would be in round $1,000 amount. All borrowings would occur at the beginning of the quarters and all repayments are made at the end of a quarter. interest payment relate only on the amount of principal that is repaid.

41. CASH BUDGET EXAMPLE CONT.……..

42. EXAMPLE CONT…….

43. BUDGETED PROCESS IN NON-PROFIT ORG . The budgeted process in non-profit making org. normally begins with the managers of various activities calculating the expected costs of maintaining current ongoing activities and then adding to those costs any further developments of services that are considered desirable. For example, the education and health departments will propose specifics activities and related costs for the coming year. 43

44. CONT . These budgets are coordinated by the accounting department into an overall budget proposal The available resources for financing that proposed level of public services should be sufficient to cover the total costs of such services. Difficulty encountered in non-profit-making organizations is that precise objectives are difficult to define in a quantifiable way, and the actual accomplishments are even more difficult to measure. 44

45. CONT. In most situations outputs cannot be measured in monetary terms. The effect of this is that budgets in non-profit organizations, tend to be mainly concerned with the input of resources (expenditure), whereas budgets in profit organizations focus on relationships between inputs (expenditure) and outputs (sales revenue). The traditional format for budgets in non-profit organizations is referred to as line item budgets . 45

46. CONT. A line item budget is one in which the expenditures are expressed in considerable detail, but the activities being undertaken are given little attention. It shows nature of the spending but not the purpose. Compliance with line item budgets provides no assurance that resources are used wisely, effectively or efficiently in financing the various activities in a non-profit organization . 46

47. THE END