BUDGETING
INTRODUCTION
• Budgeting is the process of preparing and using budgets to achieve
management objectives. A budget is a quantitative plan of action expressed
in monetary terms and is used as a tool to control resources.
• Functions or reasons and benefits of budgeting
- To guide action.
- To guide the planning process.
- To communicate expectations to all stakeholders.
- To co-ordinate the activities and efforts to achieve goals.
- To provide basis for control and performance evaluation.
- To provide a means of motivating managers and employees.
- Helps in clarification of authority and responsibility.
Essentials of successful budgeting
- Support and involvement of top management.
- Clear and realistic goals.
- Assignment of authority and responsibility.
- Build up or creation of responsibility centres.
- Full participation.
- Effective communication.
- Continuous budget education.
- Timeliness.
- Reasonably attainable targets.
- Flexibility.
Merits of budgeting
- Develops an attitude of cost consciousness.
- It compels all members of the organization to participate in goal setting
process.
- Budgeting encourages productive competition.
- It compels and motivates management to make an early and timely study of
its problems.
- It enables workers to be motivated.
-It compels all members of the departmental management to make plans in
harmony with plans of the other departments.
Demerits of budgeting
- The success and utility of budgeting depends on the co-operation and
participation of all members of management.
- Budgets are developed around existing organization structures which may be
inappropriate for current conditions.
- The existence of well documented plans may cause inertia and lack of
flexibility in adapting change.
- The establishment of a budgeting process takes time.
Stages in the budgeting process
- Communicating details of budget policy.
- Determining the factors that restrict performance.
- Preparation of revenue budgets.
- Preparation of budgets.
- Negotiation of budgets.
- Co-ordination and review of budgets.
- Final acceptance of the budgets.
- Budget review.
Classification of budgets
Functional budgets.
These include; sales budget, production units budget, direct material
utilization budget, direct materials purchases (purchasing budget), direct labor
budget, production cost budget, capital expenditure budget and cash budget.
Master budgets.
This is a budget which combines all the functional budgets.
Example of functional budgets
The following information has been made available from the records of
DBA enterprises for the next six month of 2024.
Jan Feb March April May June
Budgeted sales units 4,000 4,200 4,500 5,000 4,800 4,700
Closing stock units 1,000 1,500 1,300 800 1,200 1,400
DBA anticipates to sell each unit at Ugx2,000 every month. The company had
opening stock of finished goods amounting to 500 units. DBA planned to
reserve closing stock of finished goods at the end of the month and is part of
the produced units.
Information got from the production manager indicates that each unit will require the
following composition of costs to be complete.
Cost elements Unit cost in shillings
Raw materials 5 litres @ Ugx2,000 each 10,000
Labor costs 10 hours @ Ugx500 each 5,000
Variable overhead costs 20% of labor costs 1,000
Total 16,000
The store’s manager states that the company’s policy is to reserve raw materials
equivalent to 5% of the next month’s requirements because the suppliers are
unreliable. Closing inventory of raw materials in June will be the same figure as in
May. The raw materials are purchased from the suppliers at Ugx1,500 per litre.
Required:
Prepare the following functional budgets;
i. Sales budget.
ii. Production budget
iii. Production cost budget
iv. Raw material utilization budget
v. Materials purchases budget
vi. Labor cost budget
vii. Variable overhead cost budget
