INTRODUCTION TO BUDGET

BUDGET
According

to

Wood

and

Sangster

(2005),

budget

is a

plan

expressed

quantitatively. The budget are for planning and control so that the management
can achieved their objectives. In other words, it is a document of an organization
which is closely related to managerial as well as accounting functions
(Periasamy, 2010). Other than that, budget can be set in money terms or it can
be expressed in units. This terms or units are incorporated into a financial plan
for business that are prepared in advance. For example, most budget are
prepared for the next budget period or next financial year and are usually broken
down into shorter periods, commonly monthly or quarterly (Cox & Fardon, 2005).
Moreover, budget aid coordinating and implementing plans because planning
may not get the front and center focus that it deserves without budgets. For
example, budget are limits prescribed by the management in an organization so
that the spending budget does not exceed the limits or in other words it is also
known as limitations on spending (Horgren, Sundem, Schatzberg & Burgstahler,
2013). Furthermore, Shim and Siegel (2009) defined budget as a tools providing
targets and direction, control over the immediate environment, helps to master
the financial aspects of the job and department and solve problems before they
occur. This means budget evaluate alternative actions before decisions are
implemented so that they can control future operations and results.
BUDGETING
Budgeting is the process of converting plans into budgets. For example, for very
small businesses these process can be jot down in a piece of paper or some can
even remember budget in their heads without writing anything down (Wood &
Sangster, 2005). According to Horngren, Sundem, Schatzberg and Burgstahler
(2013), budgeting is the process of limiting the spending and moves planning to
the forefront of the managers mind. Formulation and execution of the strategy is
an integral part of budgeting of a well-managed organizations.

Other than that, Shim and Siegel (2009), defined budgeting as a technique
resulting in systematic, productive management and facilitates control and
communication and also provide motivation to employees. It achieve desired
outcomes by allocates funds and is done for the company component segment
including divisions, department, products, projects, services, manpower and
geographical areas. In other words, budgeting is done for the company as a
whole.
BUDGETARY CONTROL
Wood and Sangster (2005) in their book title Business Accounting defined
budgetary control as a budget drawn up by the management and recorded by
management accountant. Managers can control the activities of the company by
comparing the actual result against the budget based on the report that are
given by the management accountants. If the budget are being ignored or
overlooked, manager have to step in and stop the situation.
According to Cox and Fardon (2012), budgetary control are the process of
monitoring the actual results against the budget so that investigative and
corrective action are to be taken whenever there is a discrepancies. Meanwhile,
Periasamy (2010) defined budgetary control as the process of establishment
relating to various activities and comparing the budgeted figures with the actual
performances for arriving at deviations, if any. This is planned to assist the
management for policy formulation, planning, controlling and coordinating the
general objectives.

CHARACTERISTICS OF BUDGET
A budget is a quantitative expression. According to Cox and Fardon (2012),
budget may be set in money terms or it can be expresses in terms of units. Other
than that, Shim and Siegel (2009) stated it is expressed in numbers such as
dollars, units, pounds, hours, manpower and so on. It may also include expected
revenue, costs, profits, cash flow, production purchases, net worth and etc.
A budget is prepared to a particular period. The budget period varies depend on
the objectives, use and the dependability of the date used to prepared it (Shim &
Siegel, 2009). The budget period can be prepared for long term or short term.
Long term budget are usually prepared for 5 to 10 years. Meanwhile, short term
budget are prepared for a period of 1 year or it can also be quarterly or half
yearly. Other than that, there are also current budget which are prepared for the
current operation of the business generally in months or weeks. (Periasamy,
2010).
A budget is a plan of action. A business can ensure that its plans are attainable
by formalizing goals and objective through a budget. This planning can assist the
management to decide on what is needed to produce the output and of goods
and services and make sure everything will be available at the right time (Cox &
Fardon, 2012). This is supported by Horngren, Sundem, Schatzberg and
Burgstahler (2013) whereby they stated the budgeting process formalizes the
need to anticipate and prepare for changing conditions.
A budget is a benchmark to evaluate performance. According to Weetman
(2006), this is because budget provide formal target which to measure
performance and this target are the motivation for the individual to achieve
those targets. This is also stated by Cox and Fardon (2012) as they state that in
order to achieve the objectives of the business, budget can be a part of the
mechanism for motivating managers and other staff to achieve those targets.

But the budget has to be fair and achievable and it will depend on how the
budget is agreed and set.

A budget involves many people in the organization in drawing up the budget.

According to Horngren, Sundem, Schatzberg, & Burgstahler (2013), this
participation process is one way to reduce negative attitudes and improve the
quality of planning decisions. This participative system is so important that
employees involves in the budgeting process have the authority to change
operations based on the budget as they see fit. As stated by Weetman (2006),
individual who participate in the budgetary process will gain a sense of
ownership

to

the

process

and

personal

fulfillment

through

successful

implementation of the budget plans.

A budget is a financial plan to control future operations and result. According to
Cox and Fardon (2012), budgetary control can be used to monitor and compare
the budgeted and actual result. So, if the result becomes unachievable the
management can change the budget or modify the operation of the business as
the time passes. Other than that, continuous measures against the set target
that makes control possible through the use of budgetary control (Periasamy,
2010).

TYPES OF BUDGET
Principal of Budgeting:
The main components for budget are:
a) Funds
b) Activities / Outcomes
c) Timeframes
A budget can be established by forecasting in advance the processes of the
intended activities and outcomes by:
Assessment of projected income and expenses through the life of the

budget framework.

Comparison with similar budget frameworks.

Assessment of the funds available.

Pre-analysis of requirements.

Analysis of new options and approaches.

On The Basis Of Types of Budget

Different types of budgets are prepared for different purposes on the basis of
functionality, on the basis of flexibility and on the basis of period, for examples:

Capital Budget
Operational Budget
Sales Budget
Production Budget
Administrative Expense Budgets
Raw-material Budget

Labour budget
Manufacturing overhead budget
Cash Budget

Sales Budget:

Sales budget is the primary budget

Other budgets are prepared on the basis of sales budget
Forecast the future expected sales of the firm
Based on product, type of customers, salesman, locality
Past sales, sales man estimates, plant capacity, raw material, order in
hand, seasonal fluctuations, competition are taken into consideration.

Production Budget:

Schedule of production is prepared by breaking large production in small

units to fullfill the target production

A properly operated budget leads to inventory control, improved

maintenance of production schedules and production targets

If the estimated opening stock is 5000 units and estimated sales are
25000 units and closing stock of the product is 3000 units the estimated
production will be 25000 + 3000 5000 = 23000 units

Material Budget:

Materials are basically divided into two categories as direct and indirect

material
It includes the preparation of estimates of different types of the raw
material needed for various products and purchasing raw material in

required number at a required time

Requirement of raw material, companys stocking policies, price trend, and
cost of raw material are few factors to be considered

Labour Budget:

Labour requirement budgets are prepared on basis of production budget

In this budget company has to budget the required number of hours and
the expected pay scales of the employees

This budget gives information about personnel specifications for the job
for which workers are to be recruited, the degree of skill and experience
required and rates of pay

Manufacturing Overhead Budgets

This budget gives the work overhead expenses to be incurred in a budget

period to achieve the production target

The cost of indirect material and indirect labour can be calculated with the

help of this budget

Variable expenses are estimated on the basis of the budgeted output
because these expenses are bound to change with the change in output

Administrative Expenses Budget

The budget covers the expenses incurred in framing policies, directing the

organization and controlling the business operations

In this budget an estimate of expenses is prepared regarding central office
and of management salaries

Selling and Distribution Budget

This budget is used to plan for the expected selling and distribution

expenses of the firm

Cost of transportation, salesman salaries

Cash Budget

Predict the inflow and outflow of cash during the budget period
Cash sales, credit collection and other receipts in cash payments are

considered
A cash budget makes provision for a minimum cash balance which will be
available at all times

Master Budget

The master budget is the aggregation of all lower-level budgets produced

by a companys various functional areas, and also includes budgeted
financial statements, a cash forecast, and a financing plan

On The Basis Of Flexibility

Fixed Budget

This is the rigid budget and it is drawn on the assumption that there will

be no change in the budgeted time period

A fixed budget will be helpful only when actual level of activity is equal to
budgeted level of activities

Flexible Budget

It is also called as variable budget

A flexible budget gives different budgeted costs for different levels of

activities
This budget is applicable in

period
The business is new and it is difficult to predict, industry is influenced by

where activity levels vary from period to

change in fashion, when there are changes in sales

On The Basis Of Time Period
Long Term Budget

Long term budgets are prepared for those organizations, which deal in

regular product line

Here organizations are not supposed to change their proceedings in short
time periods

Short Term Budget

Short term budgets are prepared for short time periods which work for
seasonal product line

All these sectional budgets are afterwards integrated into a master budget which
represents an overall plan of the organization.

Typical Examples of a Building Project:

A typical of components of construction project budget may include:

The construction cost.

Land or property acquisition.

Approvals fees.

Planning cost.

Financing costs.

Site investigations.

Fixtures, fittings and equipment.

The cost of decanting and relocating, including costs associated with

moving staff.

Contracts outside of the main works.

Insurance.

Consultant fees.

Inflation.

Contingency.

REFERENCES
Periasamy, Dr. P. (2010). A Textbook of Financial Cost and Management
Accounting. Mumbai, IND:

Himalaya Publishing House.

Shim, J. K. & Siegel J. G. (2009). Budgeting Basics and Beyond (3rd ed.). Hoboken,
NJ: John Wiley & Sons, Inc.
Cox, D. & Fardon, M. (2012). AS Accounting for AQA (2nd ed.). United Kingdom,
UK: Osborne Books Limited.
Horngren, C.T., Sundem, G. L., Schatzberg, J. O. & Burgstahler, D. (2013).
Introduction to Management Accounting (16th ed.). New Jersey, NJ: Prentice Hall
Weetman, P. (2006). Financial and management Accounting (4TH ed.). Essex,
ENG: Prentice Hall.
Thomsett, Micheal C. (1988). The Little Black Book Of Budgets And Forecasts,
USA:

American Management Association.

Subbrayan, Radhakrishnan (2006). Corporate Budgeting Understanding The

Budgeting Process With Financial Forecasting And Free Cash Flow Calculation.
Kuala Lumpur: Golden Books Centre Sdn Bhd.
Adnan H, Nawawi AH, Ismail F, Shariff S. (2012). Holistic Construction Project
Management-Book 1. Shah Alam, KL: Penerbit Press Universiti Teknologi MARA.
Wood, F. & Sangster, A. (2005). Business Accounting. (10th ed.). Edinburgh, UK:
Prentice Hall