What is Budgeting for profit planning and Types of budget?
Introduction
Concept of budgeting
The their importance functions of management are planning and control. Planning relates to the future, operating the present a control for the past. For assisting the management in the functions of planning and control, two techniques are applied i.e. budget and standard costing system. Budgeting is usually operated with a system of standard costing therefore both the systems are under related these systems are not interring dependence.
Generally, the word budget is concerned with the limitation on spending. For example, government approves spending budgets for their various bodies. Then they expect the bodies to keep their expenditures within the limit prescribed by the budget. In contract most business organization use highlights potential problem on company operations and finances. Not just to limit spending, budgets highlights potential problems and advantages early, allowing manager to take steps to avoid these problems or use the advantages wisely.
A budget is a tool that helps manager in planning and control functions. In interestingly budgets helps with their control functions not only by looking forward but also looking backward. Budget, of course, deal with what manager's plan for the future. However, they can also be used to evaluate what happened in the past. Budget can be used as benchmark that allows managers to compare actual performance with estimated or desired performances.
According to Chartered institute of management accountants, London, "a financial statement or a quantitative statement prepared and approved period to a defined period of time of the policy to be purposed during that period for the purpose of attaining a given objective."
According to R.H garrison. "a budget to the detailed plan outlining the acquisitions and use of financial and other resources over some given time period. It represents the plan the future expressed in formal quantities term. The act of preparing a budget is called budgeting. The used of budget to control form's activities as budgetary control."
Recent servers' show just how valuable budget can be study after has shown the budget to be the most widely used and highest rates tools for cost reductions and control. Advocates of budgeting go so for as to claim that the process of budgeting a manager to become a better administrator and puts planning in the forefront of the manager's mind. Actually, many seemingly health business have closed down because managers failed to drawn up, monitor and adjust budgets to changing conditions.
Budget refers to ' accounting for future', budgeting summarized the estimated result of further transaction for the entire in must the same manner as the accounting process records and summarizes the result of completed transactions.
Futures of budget
The importance features are given below:
a. Budget is a plan: a budget is an expression of the plan of the operation of an enterprise. The operations of an enterprise are affected by a number of factor both external (such as general business conditions, government policy and size and composition of population) and interest (such as manufacturing processor, promotional programmers). A budget covers both external and internal factors and express partly, what the management expects to happen and partly what the management intends to happen.
b. It is comprehensive: a budget is comprehensive which means that it covers the activities and operations of all the segment or divisions of an organization. Budgets are prepared for each segments or division of an organization and departments of an organization.
c. It provides a co-ordinate plan: the budgets are prepared for variable segments or divisions of an organization after considering the conditions and problems of each segment. A budget helps bring co-ordination among the sections and departments of an organization.
d. It is prepared in advance: a budget is prepared in advance and includes the future courses of action. Thus, a budget is forward looking in approach.
e. It is future oriented: a budget always relates to a specified future period. A budget becomes planned to be achieved in a pre-determined time.
Objectives of preparing budget
The general objectives of preparing a budget can be summarized as follows:
a. To plan the policy of a business for the coming for achievement of the firm's objectives and its transaction into monetary and quantitative terms.
b. To determine the responsibility of each department and executive so that they are made accountable for definite and precise results.
c. To, co-ordinate the activities of a business so that each is a part of an integral total.
d. To provide for continuous comparison of actual and budgeted performance in terms of result achieved and cost incurred so that cause of any inefficiency is immediately detected and removed.
e. To control ad direct each function so that best possible results may be obtained.
f. To provides for the revision of budgets for future in the light of experience gained.
Purpose of budgeting system
A budget is a detailed plan that is expressed in quantitative terms which specified how resources will be acquired and used during a specified period of time. The procedure used to develop a budget constitutes budgeting systems. A budgeting system has five primary purposes.
a. Planning: the most obvious purpose of a budget is to quantity a plan of action. The budgeting process faces the individual who make up an organization to plan ahead. The development of a quarterly budget of an organization, for example, forecast the manager of the organization to plan for the staffing and suppliers needed to meet anticipated demand for the organization's services.
b. Facilitating communication and co-ordination: for an organization to be effective, each manager throughout the organization must be aware of the plans made by order managers. In Oder to plan reservation and ticket sale effectively manager for Nepal airlines must known the plans schedules development by the airlines router manager. The budgeting process pulls together the plans f each manager and another community services.
c. Allocating resources: generally organization's resources are limited and budgets provide on means of allocating resources among competing uses. The national Metropolitan municipality for example, must allocate its revenue among basis life services, maintenance of property and equipment and other community services.
d. Controlling profit and operations: a budget is a plan and plans are subject to change. Nevertheless, a budget serves as a useful benchmark with which actual results can be compared. For example, an insurance company can compare its actual sales of insurance policies for a year against its budgeted sales. Such comparison can hep managers evaluate the firm's effectiveness in selling insurances policies.
e. Evaluating performance and providing incentives: comparing actual result with budgeted results also helps manager to evaluate performance of individuals, department, divisions or entire companies. Since budgets are used to evaluate performance, they can also be used to provide incentive for people to perform well. For example, investment bank, like many other banks, provides incentives for managers to improve profit by awarding to managers who meet or exceed their budgeted profit goals.
Limitations of budget
The main limitations of budget may be given as follows:
a. Use of estimated figure: budget relates to figure and involves forecasting and estimations, which may not be accurate to the full extent. If the estimates are not converted, the budget target may be useless.
b. Expensive system: the installation and operation of a budgeting system is very costly, since it requires the engagement of large force of technical and qualified staff. As such budgeting may not suitable for small undertakings having limited financial resources.
c. Opposition by staff: budget provides yardsticks against which the performances of the executive and works are to be measured. The inefficiency on the part of any person involved in the organization is immediately known which calls for corrective action. As such inefficient executives and workers generally create difficulties in the way of operating this system.
d. It is simple a tool of management: the system of budgeting cannot eliminate the necessity of superior executive ability in every business decision. As such budgeting is simple a tool of management and cannot take the place of management.
e. Lack of flexibility: budgets are prepared after a lot of group done by different departments. These brininess executives treat the budgeted figures as the final figures and stick to them.
Types of budget
A budget may be classified according to a number of bases as given below.
The difference budgets under the functional classification have mentioned below in detail.
Sales budget
A sales budget is the starting point in preparing the master budget. A sales budget is a detailed schedule of expected sales expected sales for the coming period. It is usually expressed in both amount and units. Once the sales budget has been set, a decision can be made on the level of production that will be needed to support sales and the production budget can be set well. The sales budget is constructed by multiplying the expected sales units by sales price. Generally, a sales budget is accompanied by computation of expected cash receipt for the forthcoming budget period. This computation is needed to assist in preparing the cash budget for the year. Expected cash receipts are composed of collections on sales made to customers.
Unless there is realistic sales plan, practically all other element of a plan will be out of touch with reality. The sales plan is foundation of period planning in the firm because practically all other enterprise planning is bluff on it. The primary sources of cash is sales, the capital additions needed, the amount of expenses to be planned, the manpower requirements, the production level and other important operational aspects depend on the volume of sales. In harmony with a comprehensive profit plan, both strategic long term and tactical short-term sales plan must be developed.
There are some factors which are to be considered while preparing as sales budget.
a. Past sales: a sales budget is prepared on the basis of the past sales and its trend. The effects of some external factor like climatic condition, business cycle, trade cycle, economic conditions etc are adjusted and the future sales figure are adjusted.
b. Estimation of sales manager: the estimation of difference sales managers working in sales areas are also taken into consideration while preparing a sales budget.
c. Capacity of equipment: A sale is possible only when there is sufficient production. The production depends on capacity of equipment. In this way, the capacity of equipment is one factor that affects the preparations of sales budget.
d. Available of raw material: it is necessary to have enough raw materials so as to have production and sales. So, available of raw materials is one factors that affect the sales budget.
e. Competition: the level of competition also determines sales, so, it should also be considered while preparing a sales budget.
A sales budget is the starting point in preparing the master budget. A sales budget is a detailed schedule of expected sales expected sales for the coming period. It is usually expressed in both amount and units. Once the sales budget has been set, a decision can be made on the level of production that will be needed to support sales and the production budget can be set well. The sales budget is constructed by multiplying the expected sales units by sales price. Generally, a sales budget is accompanied by computation of expected cash receipt for the forthcoming budget period. This computation is needed to assist in preparing the cash budget for the year. Expected cash receipts are composed of collections on sales made to customers.
Unless there is realistic sales plan, practically all other element of a plan will be out of touch with reality. The sales plan is foundation of period planning in the firm because practically all other enterprise planning is bluff on it. The primary sources of cash is sales, the capital additions needed, the amount of expenses to be planned, the manpower requirements, the production level and other important operational aspects depend on the volume of sales. In harmony with a comprehensive profit plan, both strategic long term and tactical short-term sales plan must be developed.
There are some factors which are to be considered while preparing as sales budget.
a. Past sales: a sales budget is prepared on the basis of the past sales and its trend. The effects of some external factor like climatic condition, business cycle, trade cycle, economic conditions etc are adjusted and the future sales figure are adjusted.
b. Estimation of sales manager: the estimation of difference sales managers working in sales areas are also taken into consideration while preparing a sales budget.
c. Capacity of equipment: A sale is possible only when there is sufficient production. The production depends on capacity of equipment. In this way, the capacity of equipment is one factor that affects the preparations of sales budget.
d. Available of raw material: it is necessary to have enough raw materials so as to have production and sales. So, available of raw materials is one factors that affect the sales budget.
e. Competition: the level of competition also determines sales, so, it should also be considered while preparing a sales budget.
The format of sales budget is as under,
Production budget
Production budget is prepared after preparing the sales budget. Production budget is an estimation of the quantity of goods to be manufactured during the budget period. In the preparation of production budget, the first step is to formulate polices relative to inventory levels. The next step is to determine the total quantity of each product that is to be manufactured during the budget period. The third step is to schedule this production to interim periods.
This budget is prepared by the production manager based upon sales budget, desired ending inventory and production capacity. Following point should be considered while preparing the production budget.
• Sales budget
• Beginning and ending inventory policy
• Installed plant capacity and existing utilization
• Policy of the management manufactured or purchase of component
• Production cycle
The format of production budget is given below:
Production budget is prepared after preparing the sales budget. Production budget is an estimation of the quantity of goods to be manufactured during the budget period. In the preparation of production budget, the first step is to formulate polices relative to inventory levels. The next step is to determine the total quantity of each product that is to be manufactured during the budget period. The third step is to schedule this production to interim periods.
This budget is prepared by the production manager based upon sales budget, desired ending inventory and production capacity. Following point should be considered while preparing the production budget.
• Sales budget
• Beginning and ending inventory policy
• Installed plant capacity and existing utilization
• Policy of the management manufactured or purchase of component
• Production cycle
The format of production budget is given below:
Material consumption budget
After the preparation of production budget, a direct materials budget should be prepared to show the material that will be required in the production process. Sufficient materials will have to be available to meet production needs and to provide for the desired ending raw materials inventory. However, some quantity of material requirement will already exist in the form of a beginning g raw materials inventory. The remainder will have to be purchase form a supplier. This budget specifies the planned quantities of each raw material by time, by product and by using responsibility.
The format of material consumption budget is as under.
Material purchase budget
Direct materials are required for the production and must be purchased in each period in sufficient quantities to meet production needs and to confirm to the company's ending inventory policy. The material budget specifies the quantities and timing of each raw material needed, therefore a plan for material purchase must be developed. Material purchase budget is prepared on the basis of material consumption budget. It specifies the ending inventory raw material on the basis of material purchased and the estimated cost for each raw material.
Material purchase budget
Direct materials are required for the production and must be purchased in each period in sufficient quantities to meet production needs and to confirm to the company's ending inventory policy. The material budget specifies the quantities and timing of each raw material needed, therefore a plan for material purchase must be developed. Material purchase budget is prepared on the basis of material consumption budget. It specifies the ending inventory raw material on the basis of material purchased and the estimated cost for each raw material.
The format of material purchase budget is as under.
Direct labour budget
Direct labour is also prepared on the basis of production budget. The direct labour included the estimates to direct labour requirement necessary to product the types and quantities of output planned in the production budget. Direct labour requirement must be computed in order to know the sufficient labour time to meet production needs. By knowing in advance, the company can develop a plan to adjust the labour force as the situation may require. Planned direct labour hour can be determined by multiplying product to be produced in each period by the number of direct hour can be determined by produce a single unit. The hour of direct labour resulting from these calculations can then be multiplied by direct labour cost per hour to ob train the budgeted total direct labour cost.
The components of direct labour budget are calculated as under.
Total direct labour hour required= production unit x standard time required per unit of output
Total direct labour cost= total labour hours x labour cost of wages rafter per hour.
The above information can be obtained through the following table as well.
Direct labour is also prepared on the basis of production budget. The direct labour included the estimates to direct labour requirement necessary to product the types and quantities of output planned in the production budget. Direct labour requirement must be computed in order to know the sufficient labour time to meet production needs. By knowing in advance, the company can develop a plan to adjust the labour force as the situation may require. Planned direct labour hour can be determined by multiplying product to be produced in each period by the number of direct hour can be determined by produce a single unit. The hour of direct labour resulting from these calculations can then be multiplied by direct labour cost per hour to ob train the budgeted total direct labour cost.
The components of direct labour budget are calculated as under.
Total direct labour hour required= production unit x standard time required per unit of output
Total direct labour cost= total labour hours x labour cost of wages rafter per hour.
The above information can be obtained through the following table as well.
Overhead budget
The term ' overhead means all the expenses of an organization except direct material and direct labours. Overhead includes both fixed and variable. Estimation of expenses except direct material and direct labour is overhead budget. These are three types of overhead budget, which are given below. The last two budget are also known as operating expenses budget.
a. Manufacturing overhead budget
Manufacturing overhead is the significant portion of the production cost which is not directly identifiable with specific products. Or job. The manufacturing overhead budget provides a schedule of all costs of production, other than direct material and direct labour. Manufacturing overhead includes both fixed and variable, therefore, these costs should be broken down by cost behaviors as variable and fixed for budgeting purposes and a pre-determined overhead rate should be developed. This rate will be used to apply manufacturing overhead to the units of product throughout the budget period.
Manufacturing overhead may include cash and non-cash items both. Non-cash items like depreciation of factory building and plan and machinery are excluded and only the cash manufacturing overhead are shown in cash budget.
The format of manufacturing overhead budget is as under.
b. Office and administrative overhead budget
Administrative overheads included those expenses of the business, which will be incurred in case of administrative functions. They are incurred in the responsibility centers that provides supervision of and service to all functions of the organizations, rather than in the performance of any functions. Generally, administrative expenses are fixed installed of variable; therefore, they cannot be controlled. Most of administrative expenses except manager's salary are fixed by the management decision. Office and administrative overhead may include cash and non-cash item both. Non-cash items like depreciation on administrative overhead are shown in cash budget.
The format of office and administrative overhead budget is as under.
c. Selling and distribution overhead budget
Selling and distribution overhead include all costs related to selling and distribution of good to the customer. In most of the organization the cost is a significant portion of total overhead. Effective planning of such overhead affects the profit potential of this firm.
Selling and distribution also be fixed and variable both. Variable selling and distribution overhead will be calculated on total amount on the basis of sales unit because these costs are period cost. Selling and distribution may include cash and non-cash items like depreciation of delivery van will be exceeded and only the cash selling and distributions overheads are shown in cash budget.
The format of selling and distribution overhead budget is given below:
Selling and distribution overhead include all costs related to selling and distribution of good to the customer. In most of the organization the cost is a significant portion of total overhead. Effective planning of such overhead affects the profit potential of this firm.
Selling and distribution also be fixed and variable both. Variable selling and distribution overhead will be calculated on total amount on the basis of sales unit because these costs are period cost. Selling and distribution may include cash and non-cash items like depreciation of delivery van will be exceeded and only the cash selling and distributions overheads are shown in cash budget.
The format of selling and distribution overhead budget is given below:
Cash budget
Whether the organization big or small whatever it may be if there is profit and no cash but out of that profit it could not its obligation. To meet the obligation cash is necessary; therefore, the cash budget is one of the most significant statements prepared during the budget period without cash the existence of the company is impossible. Cash budget is prepared after all the operational budgets and capital expenditure outlays have been accomplished. Cash budget provides the information regarding beginning balance of cash, cash receipt, and cash disbursement and ending balance of cash for the budgeted period. Most company prepares both long-term and short-term plans about their cash flow. The short-term cash budget is included in annual profit plan. Generally, there are two parts two parts in the cash budget (1) the planned cash receipts, (2) the planned cash disbursement. Planned cash receipt provides the information regarding sources of cash inflow in the business and planned cash disbursement provides information about utilization of cash in the various sectors of the business. The objective of cash budget is to ensure that sufficient cash is available at all times to meet the level of operations that are outlined in the various budgets.
The cash budget includes the four major sections:
a. The receipt section: it consists of the beginning balance of cash added to whatever is expected in cash in the way of cash receipts the budget period. The major sources of receipt are the sales.
b. The disbursement section: it consists of cash payment that is planned of the budget period, these payments will include raw material purchases, direct labour payments, manufacturing overhead, are income tax, capital equipment purchases, dividend payment etc.
c. The balance section: it consists of the difference the cash receipts section total and the cash disbursement section total. If a deficiency exists, the company will need to arrange for borrowed funds from its bank. If excess exists, fund borrowed in previous period can be repaid or the idle fund can be placed in short-term investment.
The format of cash budget is given below:
Master budget in case of non-manufacturing concern
Non-manufacturing concern is also known as merchandised. The examples of merchandised business are: retailer, wholesale or department store etc. the budgeting procedure in case of a merchandised business will be the same se the process discussed above for a manufacturing business except that it does need (I) production (II) raw material (III) direct labour and (IV) manufacturing overhead. Instead of production, the merchandise firms purchases the ready for sales goods and sell them. In case of merchandise firm it would prepare merchandise purchase budget instead of production budget preparation of master budget for non-manufacturing in as follows:
The following schedules are most often completed case of a merchandised firm
• Sales budget
• Merchandised purchase budget
• Operating expenses budget
• Cash budget
1. Write the meaning of budget.
A budget is a tool that helps manager in planning and control functions. Budget help with their control not only by looking forward but also looking backward. Budget, of course, deal with what manager's plan for the future. However, they can also be used to evaluate what happened in the past. Budget can be used as benchmark that allows managers to compare actual performance with estimated or desired performances.
2. Write any five feature of budget.
The importance of budget are given below.
a. Budget is a plan: a budget is an expression of the plan of the operation of an enterprise. The operations of an enterprise are affected by a number of factor both external (such as general business conditions, government policy and size and composition of population) and interest (such as manufacturing processor, promotional programmers). A budget covers both external and internal factors and express partly, what the management expects to happen and partly what the management intends to happen.
b. It is comprehensive: a budget is comprehensive which means that it covers the activities and operations of all the segment or divisions of an organization. Budgets are prepared for each segments or division of an organization and departments of an organization.
c. It provides a co-ordinate plan: the budgets are prepared for variable segments or divisions of an organization after considering the conditions and problems of each segment. A budget helps bring co-ordination among the sections and departments of an organization.
d. It is prepared in advance: a budget is prepared in advance and includes the future courses of action. Thus, a budget is forward looking in approach.
e. It is future oriented: a budget always relates to a specified future period. A budget becomes planned to be achieved in a pre-determined time.
3. Write any five functions of budget.
The function of preparing a budget can be summarized as follows:
a. To plan the policy of a business for the coming for achievement of the firm's objectives and its transaction into monetary and quantitative terms.
b. To determine the responsibility of each department and executive so that they are made accountable for definite and precise results.
c. To, co-ordinate the activities of a business so that each is a part of an integral total.
d. To provide for continuous comparison of actual and budgeted performance in terms of result achieved and cost incurred so that cause of any inefficiency is immediately detected and removed.
e. To control ad direct each function so that best possible results may be obtained.
f. To provides for the revision of budgets for future in the light of experience gained.
A budget is a tool that helps manager in planning and control functions. Budget help with their control not only by looking forward but also looking backward. Budget, of course, deal with what manager's plan for the future. However, they can also be used to evaluate what happened in the past. Budget can be used as benchmark that allows managers to compare actual performance with estimated or desired performances.
2. Write any five feature of budget.
The importance of budget are given below.
a. Budget is a plan: a budget is an expression of the plan of the operation of an enterprise. The operations of an enterprise are affected by a number of factor both external (such as general business conditions, government policy and size and composition of population) and interest (such as manufacturing processor, promotional programmers). A budget covers both external and internal factors and express partly, what the management expects to happen and partly what the management intends to happen.
b. It is comprehensive: a budget is comprehensive which means that it covers the activities and operations of all the segment or divisions of an organization. Budgets are prepared for each segments or division of an organization and departments of an organization.
c. It provides a co-ordinate plan: the budgets are prepared for variable segments or divisions of an organization after considering the conditions and problems of each segment. A budget helps bring co-ordination among the sections and departments of an organization.
d. It is prepared in advance: a budget is prepared in advance and includes the future courses of action. Thus, a budget is forward looking in approach.
e. It is future oriented: a budget always relates to a specified future period. A budget becomes planned to be achieved in a pre-determined time.
3. Write any five functions of budget.
The function of preparing a budget can be summarized as follows:
a. To plan the policy of a business for the coming for achievement of the firm's objectives and its transaction into monetary and quantitative terms.
b. To determine the responsibility of each department and executive so that they are made accountable for definite and precise results.
c. To, co-ordinate the activities of a business so that each is a part of an integral total.
d. To provide for continuous comparison of actual and budgeted performance in terms of result achieved and cost incurred so that cause of any inefficiency is immediately detected and removed.
e. To control ad direct each function so that best possible results may be obtained.
f. To provides for the revision of budgets for future in the light of experience gained.
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