Flexible Budgets

Budgets are usually used to evaluate performance after the fact, using a process known as variance analysis. Since some costs are variable with respect to output and some are fixed, changes in output will automatically lead to increases/decreases in costs absent any input from managers. Since static budgets reflect planned output rather than actual output, they are not a good basis of comparison to actual costs.

Budgeted Balance Sheet

Budgeted balance sheet - a statement of budgeted financial position.

The ending balance in a given account equals the beginning balance plus any estimated change.

The cash budget provides the ending cash balance on the balance sheet.

Budgeted Income Statement

The budgeted income statement is easily generated using information from the previous budgets.

To complete the computation of net income, an estimate must be made of tax expense.

Advantages and Disadvantages of Budgeting

A realistic budget will motivate action. This may be true, but what is important is that the budgetary control system keeps the organisation fit, monitors its progress and provides an important database in the decision-making-process. The benefits and drawbacks of budgeting.

Marketing and Administrative Costs Budget

The marketing and administrative costs budgeting objective is to estimate the amount of marketing and administrative costs required to:

• Operate the organization at its projected level of sales and production.
• Achieve long-term company goals.
• These estimates are often based on prior period expenditures or planned expenditures, but adjusted for inflation, changes in operations, etc.

Cost of Sales Budget

Computation requires estimates of beginning and ending levels of work-in-process and finished goods inventories.
If WIP levels are assumed to be constant, the calculation reduces to:

• Estimated cost of sales= Estimated production costs + Budgeted cost of beginning inventory – Budgeted cost of ending inventory

Purposes of Budgeting Systems

Budgeting system - procedures used to develop a budget. Budgeting systems have five major purposes:

• Planning.
• Facilitating communication and coordination.
• Allocating resources.
• Controlling profit and operations.
• Evaluating performance and providing incentives.

The Master Budget - Definition

Master budget - a financial plan of an organization for the coming year or other planning period.  It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet.

Overhead Budget

Amounts of labor and overhead expected to be consumed are based on the production budget.

These amounts are also used to forecast staffing levels.

Overhead estimates tie back to estimated capital budgeting expenditures for capacity.

Materials Purchase Budget

We use the following relationship to forecast material purchase requirements:

• Required purchases in units= Materials to be used in production + Budgeted ending inventory- Budgeted beginning inventory

Ending Inventory and Production Budgets

We use the following relationship to forecast production requirements:

• Required production in units= Budgeted sales in unites + Budgeted ending inventory – Budgeted in beginning inventory

Sales Budget

The sales budget is the basis for all other budget components.
Units to be sold are a function of the forecasted selling price.
The budget requires a forecast of sales, typically involving sales staff and market research.  Various statistical techniques may also be used.  Sales may be forecasted in units and in dollars.
Budgeted revenues can be computed as:

• Forecasted sales (in units) x Forecasted selling price.

What is a Budget?

A budget is a detailed plan for the acquisition and use of financial and other resources over a specified period of time.  Good budgeting practice should provide for both planning and control.