I will later

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DEFINITION A budget is a quantitative projection of business operation. It is the formal process of planning future activities that involve the acquisition and use of resources during a specified time period (called a budget period). It helps management to carry out its control function by periodically actual performance with that planned for in the budget. This comparison of actual and budgeted performance is done by using budgeted performance report.

PURPOSES OF BUGETING1. Compels Planning - Budgeting helps managers set realistic goals by requiring them to plan specific actions to meet their goals. Budgeting also helps managers prepare for a range of conditions. It leads them to ask what-if questions and to plan for contingencies.. Control - means to monitor the business process and rectify any deviation of the performance from original plan by comparison of actual and budgeted figures. A department or activity can be evaluated by such comparison and a budget is pretty good benchmark for evaluation as it is based on the company¡¦s current status. It considers all changes from past conditions. . Co-ordination - The master budget coordinates the activities of the organization. It forces managers to consider relationships among operations across the entire value chain. 4. Communication - Goals, targets, and other information need to be communicated to the relevant employees in order to promote understanding and facilitate operating flows. Budgets convey such useful information to employees who may not be directly involved in such activities.5. Motivation -The goals and targets as stipulated in the budgets may serve as motivators for employees.BUDGET PERIOD The accounting year is often split into quarterly or monthly control periods. Fixed Budgeting Method - The budget period may be fixed for a defined time frame. In fixed budgeting method, a budget would begin with a full period¡¦s budget information; as times goes by, the remaining budget period¡¦s budget information will be applicable only to the remaining part of the period. The fixed budget is criticized for not providing enough budget information throughout the period concerned. Continuous Budgeting Method - Most businesses now prepare budgets on a continuous basis. For a yearly budget, within one quarter or month, budget information for the fourth quarter or twelfth month ahead is obtained, and often the original budget information for the remaining three-quarters or eleven months is revised. Thus, there is always a year¡¦s budget available at any time to management. Under this continuous budgeting method, the budgets are known as continuous budgets. Medium-range Plan - Many large businesses also prepare a strategic plan containing a longer-term budget, usually covering five years. These financial plans are often called medium-rang plans. They serve as a guide to management in preparing the annual budgets. They indicate in broad terms the general direction in which the business is heading.TYPES OF BUDGETSThe output of the budgeting process is the master budget which is a set of interrelated budgets representing a comprehensive plan of action for the relevant budget period.1. Operating Budget - comprises the budgeted income statement and its component budgets on sales, costs, and expenses. It sets the expected revenues and expenses - and thus operating income - for the period. Sales or revenue budget Purchases, cost of goods sold and inventory budget Operating expenses budget Budgeted income statement . Financial Budget - comprises the cash budget, capital expenditure budget, the budgeted balance sheet, and the budgeted statement of sources and application of funds. It projects cash inflows and outflows and the period-ending balance sheet. Cash Budget - statement of budgeted cash receipts and disbursements, details how the business expects to proceed from the beginning cash balance to the desired ending balance. Budgeted Balance Sheet. Capital Expenditures Budget - presents the company¡¦s plan for purchases of property, plant, equipment, and other long-term assets. (Not involved in B10) BUDGETED INCOME STATEMENT (OPERATING BUDGET)The budgeted income statement bring together plans from the sales budget, the group of budgets which give estimated cost of goods sold, and three expense budgets on selling, administrative and financial expenses.Procedure1. Sales Budget. Production Budget. Direct Materials Budget4. Direct Labour Budget5. Factory Overhead Budget6. Cost of Goods sold Budget7. Expense Budget8. Budgeted Income Statement1. Sales Budget - Components based onÜ Product groupsÜ Geographical locations (specific store or branch) . Production Budget - Shows the quantity of units of finished products to be produced within the period. The units to be produced in a month is equal to Ü the budget sales volume for that monthÜ + the desired finished goods inventory at the end of the monthÜ Minus the finished goods inventory at the beginning of the month ( Note The entries for beginning or ending balances under the total column are not the total amount of individual monthly balances but the figures that represent either the beginning balance for the whole period concerned or the ending balance for the whole period concerned.) . Direct Materials Budget - shows the quantities of direct materials to be purchased and the associated cost within the period. The direct material to be purchased in a month is equal toÜ the quantity required for the current month¡¦s productionÜ + the desired ending quantityÜ Minus the beginning quantity 4. Direct Labour Budget - shows how many direct labour hour s will be needed for the monthly production and at what cost level within the budget or control period. 5. Factory Overhead Budget6. Cost of Goods sold Budget7. Expense Budget - includes selling, administrative and financial expenses8. Budgeted Income StatementCASH BUDGETIt represents the timing of expected receipt and payments, and its purpose is to make sure that sufficient levels of cash will be available during the year. It can be presented in two formats-| the total receipts and total payments format| the trading transactions and non-trading transaction format.Point to Note1. Discount Allowed e.g. /10, n/0 - means a % discount if payment is made within 10days from the date of invoice; the net invoice sum is to be paid within the credit period of 0days if the cash discount is not taken. . Calculation of cash collected from credit sales If the credit terms are 0days, then in any month the cash to be collected on credit sales will be the previous month¡¦s sales. If the credit terms are 45 days, then in any month the collection will be 50% of the previous month¡¦s credit sales and 50% of the credit sales of the month before the previous month. If the credit terms are 60 days, then in any month the collection will be 100% of the credit sales of month before the previous month. If the credit terms are /10, n/0, and half of the credit sales are assumed to be paid with discount allowed, then in any month the collection from credit sales customers will be 8% of half of two-thirds of the current month¡¦s credit sales and 8% of one-third of the previous month¡¦s sales, plus 100% of one-half of the previous month¡¦s credit sales.Why the actual performance failed to meet the budget?1. The budget was unrealistic.. The business did a poor job of selling or production during the period.. Uncontrollable factors hindered the performance. i will later Please note that this sample paper on i will later is for your review only. 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