Budgeting

Budgeting

1. Budgeting involves

   • Establishing specific goals
   • Executing plans to achieve goals
     • Human behavior problems
       • Tight goals
         • Discourage and negativity
       • Loose goals
         • Inefficiency
       • Conflcting goals
         • Employees' interests differ from those of the company
   • Comparing the results with goals
   • Budgeting affects: planning, directing and controlling
     • Controlling compares actual performance against budgeted goals

2. Budgeting Systems

   • Continuous budgeting: 12-month projection into the future
     • Static budget
       • shows expected results for only one activity level
       • It does not adjust for changes in activity levels
     • Flexible budget
       • shows expected results for several activity levels
       • It is a series of static budgets for different levels

3. Master Budget

   • Operating budget
     • Sales Budget: estimates quantity of sales
       • Budgeted income statement: summarizes the budgeted operating activities of the company
     • Production budget: estimates the units to be manufactured
     • Direct materials purchase budget: estimates the quantities of materials to be purchased
     • Direct labor cost budget: estimates the direct labor hours
     • Factory overhead cost budget
     • Cost of goods sold budget
     • Selling and administrative expenses budget
     • Budgeted Balance Sheet
       • Based on the operating and financial budget of the master budget
   • Financial Budget
     • Cash budget: estimates the expected inflows and outflows of cash
       • Estimated cash receipts: the primary source of cash is from cash sales and collections on account
       • Estimated cash payments: must be budgeted for operating costs and expenses such as manufacturing costs
     • Capital expenditures budget: summarizes purchases of fixed assets