BASIC BUDGETING
LEARNING OBJECTIVE
- FUNCTION OF BUDGETARY CONTROL
- PREPARING THE BUDGET
- STANDARD COSTS AND FLEXIBLE BUDGETS
1.FUNCTION OF BUDGETARY CONTROL
Essentially the budgetary control process consists of two distinct elements:
Planning
This involves the setting of the various budgets for the appropriate future period.
Control
This control involves comparing the plan in the form of the original budget with the actual results achieved for the period under consideration.
Feedback control is action taken by a manager in response to recorded differences between the budget and actual performance. The action may be taken to correct deviations or to revise the budget if appropriate.
2. PREPARING THE BUDGET
A principal budget factor is the factor that limits the activity level for the organization as a whole.
The first step is to determine the limiting factor for the organisation that is known as the principal budget factor. Raw materials or labour might be the limiting factor.
- Sales are prepared first
- Production budget
Budgeted production = budgeted sales + budgeted closing finished goods inventory – budgeted opening finished goods inventory.
- Raw Materials
Budgeted raw materials purchases = budgeted raw materials usage + budgeted closing inventory of raw materials – budgeted opening inventory of raw materials.
- Labour Budget
Determine the number of labour hours needed in order to make the products. The rate of pay for each grade of labour can then be applied to produce the labour cost budget.
- Expenditure Budgets
Finally budgets will be set for production expenses, selling expenses and administration expenses based upon the level of activity that has been set in the production and sales budgets.
- Master Budget
Once all of these subsidiary budgets have been set then they will often all be brought together in a master budget. This will normally consist of a budgeted income statement, budgeted balance sheet ( statement of financial position) and a cash flow budget.
3. STANDARD COSTS AND FLEXIBLE BUDGETS
Standards are predetermined measurable quantities set in defined conditions.
e.g. suppose that a journey of 100 miles normally takes two hours.
Standard cost is the cost expected for a single unit of output for a future period of time.
Flexible budgets: the simple budgeting process described above is the preparation of a fixed budget. A fixed budget assumes a level of costs and revenues for a specific level of activity.
Source:
1. KAPLAN
2. BPP
3. Phnom Penh HR