Budgeting for planning

Budgeting for planning
Concept of budget
The three importance functions of management are panning, operating and control, planning relates to the future, operating to the present and controlling to the past and future activities. For assisting the management in the functions of planning and control, two techniques with an applied i.e. building and standard costing systems. Budgeting is usually operated with a system of standard costing therefore both the systems are item related but these systems are not inter-dependence.

Generally, the word budget is computed 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, many business organizations use budget to focus alternation 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 and advantages early, allowing manager to take steps to avoid these problems or use the advantages wisely.

A budget is a tool helps manager in planning and control functions. In interestingly, it helps by using control functions not only looking forward but also looking backward. Budget, of course, deals with what manager's plan for the future. However, it can also used to evaluate what happened in the past. It is a 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 qualitative statement prepared and approved prior to a defined period of time of the policy to be purpose during that period for the purpose of attaining a given objective.

According to R.H Garrison, " A budget is the detailed plan outlining the acquisition and use of financial and other resources over some given time period. It reprents the plan for the future experessed in formal quantities term. The act of preparing a budget is called budgeting. The uses of budget to control firm's activities are known as budgetary control."

Recent surveys show just how valuable budget can be study after study has shown the budget to be the most widely nursed and highest rated tools for cost reduction and control, advantages of budgeting go so far as to as to claim that the process of budgeting forces a manager to become a better administrator and puts panning in the forefront of the manager's mind. Actually, many seemingly health businesses have closed down because managers failed to draw up, monitor and adjust budgets to changing conditions.

Thus, budget refers to 'accounting for future'. Budgeting summarized the estimated result of future transactions for the entire company in much the same manner as the accounting process records and summarizes the results of completed transactions.

Feature of budget
A budget includes the following features or essentials:
a.    Budget is a plan: a budget is an expression of the plan of the operation of an enterprise. The operations of an eateries are affected by a number of factors both external (such as general business conditions, government policy and size as well as composition of population) and internet (such as manufacturing process, promotional programmers etc.). It covers both external and internal factors and expresses partly, what thee management expects to ha happen and partly what the management intends to happened.
b.    It is comprehensive: a budget is comprehensive which means that it covers the activities and operations of all the segments or division of an organization. Budgets are prepared for each segment or division of an organization and all these are integrated into master budget.
c.    It provides a co-ordinate plan: the budgets are prepared for variable segments or division of the organization after considering the conditions and problems of each segment. It helps to 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 feature courses of actions. Thus, a budget is forward looking in approach.
e.    It is future oriented: a budget always related to a specified future period. A budget becomes meaningless if it is not related to a time horizon. Thus, budgeted production, sales, profit etc. are planned to be achieved in a pre-determined time.

Importance/ objective of preparing budget
The general objective of preparing a budget can be summarized as follows:
a.    To plan the policy of a business for the next eriod for achievement of the firm's objective and its transaction into monetary and quantitative terms.
b.    To determine the responsibility of each department and executive so 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 continues comparison of actual and budgeted performance in terms of results achieved and cost incurred so that cause of any inefficiency is immediately detected and removed.
e.    To control and direct each functions so that best possible results may be obtained.
f.    To provide for the revision of budgets for futures in the light of experience gained.

Types of Budget
There are mainly two types of business organizations. They are manufacturing and trading concerns. They prepare different budgets as a part of profit plan which is mentioned below:

As per the requirement of syllabus, sales budget, production budget, materials consumption budget, materials purchase budget, direct labour budget, manufacturing overhead budget, cost of goods manufactured budget, administrative overhead budget, selling and distributions overhead budget and cost of goods sold budgets are discussed below.

Sales budget
A sales budget is the starting point in preparing the master budget. A sales budget is a detailed schedule of 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 suppoet sales and the production budget and be set well. The sales budget is accompanied by computation of expected ash receipt for the forthcoming budget period. It is needed to assist in preparing the budget for the year.

The primary source of cash is sales. The capital additions need amount of expenses to be planned, the manpower requirements, the production level and other important operational aspects depend on the volume of sales.
There are some factors which are to be considered while preparing a sales budget.

a.    Past sales: a budget is prepared on the basis of the past sales and its trends. The effects of some external factors like climatic condition, business cycle, trade cycle, economic conditions etc are adjusted and the future sales figures are received.
b.    Estimation of sales manager: the estimation of different sales manager working in sales areas are also taken into consideration while preparing a sales budget.
c.    Production capacity: Sales is possible only when there is sufficient production. The production depends on production capacity. In this way, capacity is a factor that affects the preparation of sales budget.
d.    Available of raw material: it is necessary to have enough raw materials so as to have production and sales. So, availability of raw materials is one factor that affect to sales budget.
e.    Competition: the level of competition also determines sales. So, it should also be considered while preparing a sales budget.

Production budget
Production budget is prepared after preparing the sales budget. This budget is an estimation of the quantity of goods to be manufacturing during the budgeted period. In preparation of production budget, the first step is to formulate policies relative to inventory levels. The next step is to determine the total quantity of each product that is to be manufactured during the budgeted period and the third step is to make schedule the production for budgeted period.
This budget is prepared by the production manager taking information from sales budget, desired ending inventory and production capacity, following information are should be considered while preparing production budget.

•    Sales budget
•    Beginning and ending inventory policy
•    Installed plant capacity existing utilization

Material consumption budget
After the preparation of production budget, a direct materials or raw materials consumption budget should be prepared to show the materials that will be required in the production process. Sufficient raw materials will have to be available to meet production needs and to provide for the desired ending raw materials inventory. However, some quantity of materials remained will have to be purchase from a suppliers. This budget specifies the planned quantities of each raw material by time, by using responsibility.

Material purchase budget
Direct materials are required for the production and must be purchase in each period in sufficient quantities to meet production needs and to confirm to the company's ending inventory policies. The materials budget specifies the quantities and timing of each raw materials needed, therefore a plan for material purchase must be developed. Material purchase budget is prepared on the basis of materials consumption. It specifies the ending inventory raw materials, estimated quantities to be purchase and cost for raw material.

Merchandise purchase budget
Merchandise purchase means the value of trading goods for a trading goods for a trading concern. They are finished products bought by the trade to self them in the market. A manufacturing concern prepares raw materials purchase budget as it requires raw materials in production process. However, raw materials are not needed for trading concern, since it is not involved in production. Hence, it prepared merchandise purchase budget considering the expected sales, gross margin and stock of merchandise to be maintained.

Direct labour budget
Direct labour budget is also prepared on the basis of production budget. The direct labour included the estimation of direct labour requirements necessary to produce the types and quantities of output planned in the production budget. Direct labour requirements must be computed in order to known 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 hour can be determined by multiplying product to be produced in each period by the number of direct labour hours required to product a single unit. The hours of direct labour resulting from these calculations a then be mulled by direct labour cost per hour obtain the budgeted total direct labour cost.

 The components of direct labour budget are calculated as under:
Total direct labour hours required = production units x standard time required per unit of output
Total direct labour cost = total labour hours x labour cost or wages rate per hour.

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 materials and direct labour. Manufacturing overheads includes both fixed and variable, therefore, these costs should be broken down by cost behavior into as variable and fixed portion 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 through the budget period. Manufacturing overhead may included both cash and non-cash items.
Cost of goods manufactured budget
Cost of goods manufactured budget shows the cost of carrying production plan. It included cost of direct material, direct labour, direct expense and factory overhead. It is normally prepared on the basis of product or determent. It is prepared to estimate the manufacturing costs that are executed to be uncured on budgeted finished goods.
Administrative expenses (overhead) budget
Administrative overheads included those expenses of the business, which are included in case of administrative functions. They are incurred in the responsibility centers that provide supervision of and service to all functions of the organizations, rather than in the performance of any functions. Generally, administrative expenses except manager's salary are fixed by the management decisions. Office and administrative overheads may included both cash and non-cash item.

Selling and distribution overhead budget
Selling and distribution overheads included all costs related to selling and distribution of goods to the customers. In most of the organizations the cost is a significant portion of total overheads. Effective panning of such overhead affects the profit potential of the firm.

 Selling and distribution overhead also be both fixed and variable. Variable selling and distribution overheads are calculated on total amount on the basis of sales unit because these costs are period cost. Selling and distribution costs may include cash and non-cash items.

Cost of goods sold budget
Cost of goods sold budget is the estimation of total incurred to produce goods or services. Cost of goods sold is the base for determining selling price to earn a desired level of profit.