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BUDGETING
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Strategic Planning
Every enterprise has a set of goals
Every enterprise has a set of goals
Strategic
Planning
StrategicPlanning
PublicService
PublicService
Profitability
Profitability
Growth
Growth
Achieving and
Maintaining
a Competitive
Advantage
Achieving and
Maintaininga Competitive
Advantage
IDENTIFY
CRITICAL SUCCESSFACTORS
IDENTIFY
CRITICAL SUCCESSFACTORS
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What is a Strategic Long-Range Plan?
What is a Strategic Long-Range Plan?
Strategic Planning
It discusses the major capital investments required to:
It discusses the major capital investments required to:
It expresses the specific steps required toachieve the organizations goal
It expresses the specific steps required to
achieve the organizations goal
Increase
Capacity
Increase
Capacity
Diversify
Products or
Processes
Diversify
Products or
Processes
Maintain
PresentFacilities
Maintain
PresentFacilities
Develop
ParticularMarkets
Develop
ParticularMarkets
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Budget
A budget is the quantitativeexpression
of a proposed plan of action by management
for a future time period and
an aid to the coordination andimplementation of the plan.
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Definition of Budget Donella Rapier
Budget is a quantitative expressionof a plan of action.
Budget serves as a goal that
organisation strives to achieve.
What is a budgetingsystem?What is a budgetingsystem?
The procedures used todevelop a budgetThe procedures used todevelop a budget
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Why do we need Budgets? 1. To aid the planning of actual
operations:
by forcing managers to consider howconditions might change and whatsteps should be taken now.
by encouraging managers to considerproblems before they arise.
2. To co-ordinate the activities of the
organization:by compelling managers to examine
relationships between their own
operation and those of otherdepartments.
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Why do we need Budgets?...(2) 3. To communicate plans to various
responsibility centre managers:
everyone in the organization shouldhave a clear understanding of the partthey are expected to play in achieving
the annual budget.by ensuring appropriate individuals are
made accountable for implementing thebudget.
4. To motivate managers to strive toachieve the budget goals:
by focusing on participation
by providing a challenge/target.
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Why do we need Budgets?...(3) 5. To control activities:
by comparison of actual with budget(attention directing/management byexception).
6. To evaluate the performance ofmanagers:
by providing a means of informing
managers of how well they areperforming in meeting targets they havepreviously set.
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Budgeting Cycle
Planning the performance of theorganization
Providing a frame of reference, a set
of specific expectations againstwhich actual results can becompared
Investigating variations from plans Correcting action follows, if
necessary
Planning again
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Stages in Budgeting Process1.Communicate details of budget policy and
guidelines to those people responsible for
preparing the budget.
2. Determine the factor that restricts output.
3. Preparation of the sales budget.
4. Initial preparation of budgets.
5. Negotiation of budgets with higher management.
6. Co-ordination and review of budgets.
7. Final acceptance of budgets.
8. Ongoing review of the budgets.
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Budgeting
CycleBudgeting
Cycle Evaluating Performanceand Providing
Incentives
Evaluating Performance
and Providing
Incentives
PlanningPlanning
Facilitating
Communication
and Coordination
Facilitating
Communication
and Coordination
Managing Financial
and
Operating Performance
Managing Financial
and
Operating Performance
Allocating
ResourcesAllocating
Resources
Budgeting Cycle
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Master Budget?
MB is a comprehensive expression
of managements operating and
financial plans
for a future time period
MB includes Operating &Financing.
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Master Budget Components
Operating budget
Revenue budget
Production budget in units
Direct materials purchase budget
Direct labour budget
Cost of goods sold budget Nonmanufacturing costs budget
Budgeted income statement
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Time Coverage of Budgets
Budgets typically have a set timeperiod (month, quarter, year).
This time period can itself be brokeninto sub-periods.
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MASTER BUDGETSales Budget
Production Budget
Direct MaterialBudget
Budgeted schedule
cost of goods
manufactured and sold
Budgeted balance
Statement
Direct LaborBudget
Mft. OverheadBudget
Cash budget
Budgeted income
Statement
Budgeted Statement
of Cash Flows
Sales Budget
Selling, General
and Administrative
Budget
R&D
Budget
MarketingBudget
Customer Service
Budget
OperationalBudget
Budgeted
FinancialStatements
Capital Budget
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Master Budget Components
Financial budget Capital budget
Cash budget
Budgeted balance sheet
Budgeted statement of cash flows
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Production Budget
Budgeted sales (units)+ Target ending finished goods
inventory (units)
Beginning finished goods inventory(units)
= Budgeted production (units)
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Cost of Goods Sold Budget
Cost of goods manufactured+ Finished goods beginning inventory
= Cost of goods available for sale
Finished goods ending inventory
= Cost of goods sold
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Cash Budget
Cash Budget A cash budget shows expected cash
receipts and disbursements; it
indicates the months having cashshortages and excesses.
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Feedback and Fixing Blame
Budgets coupled with responsibilityaccounting provide systematic helpfor managers, particularly if
managers interpret the feedbackcarefully.
Use of variances
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Activity-based budgeting (ABB)
Conventional budgeting is inappropriate for those activities
where the consumption of resources does not vary
proportionately with the volume of the final output of
products or services.
For support activities conventional incremental budgetsmerely serve as authorization levels for certain levels of
spending.
Incremental budgeting results in the cost of non-unit level
activities becoming fixed.
ABB aims to authorize only the supply of those resources
that are needed to perform activities required to meet
budgeted production and sales volumes.
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Thank you