In business, a budget formally expresses the expected income and expenditure for a definite future period. According to J. Fred Meston, “a budget is the expression of a firm’s plan in financial form for a period of time in the future.” According to J.L. Brown and L.R. Howard, “a budget is a predetermined statement of management policy during a given period which provides a standard comparison with the result actually achieved.” George R. Terry defines a budget as “an estimate of future needs arranged according to an orderly basis, covering some or all the activities of an enterprise for a definite period of time.” The Institute of Cost and Management Accountants defines a budget as “a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective.” The three principal functions of management comprise planning, operating, and control. Planning refers to the future, operating to the present, and control to the past. Two techniques, namely, budgetary control and standard costing systems, assist planning and control. A budgetary control system tends to operate with a system of standard costing since both systems are interrelated. However, the two systems are not interdependent. The term “budget” derives from the French word “bougette”: a leather bag from which the Minister of the Government would take out his proposals regarding governmental expenditure and revenue during the coming financial period. Nowadays, the term also encompasses domestic, business, and institutional affairs. 1. A budget is a plan. A budget expresses an enterprise’s operations affected by external and internal factors. External factors include business conditions, government policy, and population size; internal factors include manufacturing processes and corporate governance. 2. It is comprehensive. A budget covers all activities and operations of an organization. Each segment or division has a budget integrated into a master budget. 3. It provides for a coordinated plan. Budgets consider the conditions and problems of each segment and are prepared in harmony with one another. 4. It is readied in advance. A budget is prepared in advance and denotes the future course of action. 5. It relates to a specific future period. A budget relates to a specified period. Thus, the budgeted output, sales, and profits aim to meet a predetermined time framework. 6. A budget includes operations and resources. Such operations are expressed in terms of revenues and expenses. Resources refer to the various assets and the sources of capital available to finance these operations. 7. A budget is expressed in financial and/or quantitative terms. A business concern’s activities and operations are expressible in different units. For instance, the material budget is expressed in terms of weight, the labor budget in terms of labor hours, and the sales budget in terms of sales territories. All budgets have to include a comparable unit of measurement. 8. A budget provides a yardstick for the comparison of actual performance. This comparison exercises effective control over the business operations since it helps fix the responsibility for variances between actual and budgeted performance. Budgets may be classified on the basis of: (A) Functions involved Budgets may be split according to their function: (i) Functional budgets and (ii) a master budget. A functional budget relates to any of the functions of an undertaking, e.g., sales, production, finance, purchases, and administration. In a manufacturing concern, the following detailed functional budgets are prepared: Forecasts sales during a given period, both in quantity and value. Tricky to prepare due to the difficulties estimating consumer’s demand. The responsibility for this budget’s preparation lies with the sales manager. This budget is classified under numerous headings: product or product group, territories, areas, countries, type of customer, export, customers, salesman, period, and more The specimen of a Sales Budget has been given below: C. Bros sells two products manufactured in one plant. During the year 2019-20 it planned to sell the following quantities of each product: C. Bros. plans to sell product 1 throughout the year at $10 a unit and product 2 at $20 a unit. A study of previous experiences reveals that C. Bros. has lost approximately 3% of its billed revenue each year because of returns (constituting a 2% revenue loss), allowances, and bad debts (1% loss). Prepare a budget incorporating the given information. (2) Selling and Distribution Cost BudgetThis budget shows the cost of selling and distributing the quantities shown in the sales budget. The primary factors affecting the budget include the sales channels, the sales promotion plan, the sales territories, and the dispatch of products. The sales manager, with the aid of the distribution manager, advertising manager, sales office manager, and accountant, draws up the budget. Compiling this budget involves grouping the expenses according to the elements: direct selling expenses, sales office expenses, distribution expenses, and advertising expenses. ExampleThe following table shows the selling and distribution expenses of X Ltd., incurred during the year ended on 31 March, 2019: The following additional information applies for the following year: 1. Management decided to participate in ‘The International Trade Fair’ in February 2020. Estimates suggest an expenditure of $40,000: the head office will meet this connection. 2. Four additional salesmen will be appointed next year to increase sales in north division 4. They will each receive $300 per month. 3. Management also decided to promote sales in the south through an independent sales division. This will increase the expenditure as follows:
4. Extensive advertisement programs will be adopted for which the head office will spend $20,000. 5. The commission will be given @ 5% on sales. 6. There will be an expenditure for credit collection @ 1% on sales. 7. Customers will receive a discount and rebate @ 10% on sales. Other expenses will remain unchanged. 8. Estimated sales for the next year will be as follows:
Prepare the selling and distribution cost budget for the year ending 31 March 2020 from the above details. Solution(3) Production BudgetA production budget estimates the number of goods requiring production during the budget period. The production manager prepares the budget given the following factors:
The production budget may be classified under the following heads:
ExamplePrepare a production budget from the following particulars for the year ended 31 March 2019:
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