M.

Naveed Alam 1
Budgets and the Organization
 Budgets - Goals and objectives
 A budget provides a comprehensive financial &
overview of planned company operations.

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Purpose of Budgets
 Planning The future
 Contr0lling Cost
 Co-ordination
 Communication
 Motivation
 Evaluation
 Authorization

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Human Relations Problems
1. Low levels of participation in the budget process and
Lack of acceptance of responsibility for the final budget.

2. Incentives to lie and cheat in the budget process.

3. Difficulties in obtaining accurate sales forecasts.

Management should seek to create an environment where

there is a true two-way flow of information.

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Potential Problems in Implementing Budgets
1. Participative budgets are formulated with the
active participation of all affected employees.

2. Message conveyed by the budget system may be

misaligned with incentives provided by the
compensation system.

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Stage of Budget Preparation
 Sales budget
 Cost of goods sold budget
 Production budget
 Direct materials budget
 Direct labor budget
 Factory overhead budget
 Selling and administrative expenses budget
 Master Budget
 Budgeted Income statement
 Cash Budget
 Budgeted Balance sheet
 Capital Budget.
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Sales Budget
 This is the basis for
preparing all other budgets.

 Projects the volume of sales

both in units and dollars.

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Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

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 Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

Production Budget

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Direct Materials Budget
 The direct materials budget is prepared once the
production requirements have been determined.

 The desired ending inventory for each material is

added to the quantity needed to meet production
needs, and that total is reduced by the estimated
beginning inventory to determine the amount of
materials to be purchased.

M. Naveed Alam 10
 Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

Purchase

Purchase

Purchase
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Direct Labor Budget
 The production requirements
are used to prepare the direct
labor budget.

 Standard labor time allowed

per unit is multiplied by the
number of required units to
obtain the total direct
manufacturing labor hours.

M. Naveed Alam 12
Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

M. Naveed Alam 13
Factory Overhead Budget
 Consists of the estimated individual factory overhead
items needed to meet production requirements.

M. Naveed Alam 14
Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

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Production Budget
 Budget is prepared once the direct material,
direct labor, and factory overhead budgets
have been completed.

 The estimated beginning inventories and the

desired ending inventories of WIP and
Finished Goods are included to compute the
Production Budget.

M. Naveed Alam 16
Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

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Selling & Administrative
Expenses Budget
 The selling and
administrative expenses
budget may be prepared
once the sales forecast has
been made.

 This budget has separate

sections for selling and
administrative expenses.

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Budgeted Income Statement
 Once the preceding budgets have been
completed, the budgeted income statement
may be prepared.

 If the budgeted profit does not meet

expectations, management may wish to
reevaluate their original expectations.

M. Naveed Alam 19
Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

M. Naveed Alam 20
Flexible Budgeting
 A plan of what will happen to a company under
varying sets of conditions.
 The company plans in advance what the effect will be
on revenue, expense, and profit if sales or production
differ from the budget.
 Standard production is determined and the initial
calculation of variable and fixed costs is based on this
level of production.

M. Naveed Alam 21
Ref 7th Ed Chapter # 16 Ques # 7
Ref 9th Ed Chapter # 15 Ques # 6

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Preparing the Flexible Budget for
Factory Overhead
 The standard production level must first be
determined.

 The manufacturing capacity must be determined.

 Theoretical capacity
 Practical capacity
 Normal capacity

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Semifixed Costs
 Semifixed costs are
those that generally
remain the same in
dollar amount through
a wide range of activity,
but increase when
production exceeds
certain limits.

M. Naveed Alam 24
Semivariable Costs
 Semivariable costs are
those that may change
with production but not
necessarily in direct
proportion.

M. Naveed Alam 25
 Summary of the Budgeting Process
1 A Sales Forecast in units, considering the
2 Inventory Policy, minimum-maximum and stable or fluctuating, helps in
developing the
3 Production Plan in units and by periods.
This information aids in developing the
4(a) Requirements for 4(b) Requirements for 4(c) Requirements for
Direct Materials Direct Labor Indirect Costs, Facilities,
(quantities and prices) (hours and rates) and Supplies
(fixed and variable costs)
From this information is developed the
5(a) Direct Materials 5(b) Direct Labor Budget 5(c) Factory Overhead
Budget Budget

From these budgets are developed the

6(a) Standard Unit Cost for 6(b) Standard Unit Cost for 6(c) Standard Unit Cost for
Direct Materials Direct Labor Factory Overhead
(These combined figures determine the Standard Unit Cost for the Product.)
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 Required 16-1
 Sales Qty & Value Budget.
 Production Qty Budget.
 Material Usage Qty & Value Budget.
 Material Purchase Qty & Value Budget.
 Labour Hours & Value Budget.
 FOH Value Budget.
 Income Statement
 Flexible Budget ~ Income Statement
 Product Wise Profitability.

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Purchase

Purchase

Purchase M. Naveed Alam 31

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