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Francis Kuagbela Senior Lecturer of Accounting & Finance The university of Sunderland School of Business & Law
Learning Objectives
Explain how budgeting fits into the overall framework of decision-making, planning and control Describe the purposes and uses of budgets in organisations Identify the various stages in the traditional budgeting process Describe some of the benefits of effective budgeting Construct cash budgets from relevant data
Control
involves the steps taken by management that attempt to ensure the objectives are attained.
Advantages of Budgeting
Define goals and objectives Communicate plans Think about and plan for the future
Advantages
Coordinate activities
Uncover potential bottlenecks
To control activities:
by comparison between actual and budgeted performance.
2012
2013
2014
2015
The annual operating budget may be divided into quarterly or monthly budgets.
Self-Imposed Budget
Top Management Middle Management Middle Management
Supervisor
Supervisor
Supervisor
Supervisor
A participative budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget.
1.
Advantages of Self-Imposed Individuals at all levels of the organization are viewed as Budgets
members of the team whose judgments are valued by top management. 2. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers.
3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. 4. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this explanation.
An Example - Scenario
L Co. manufactures 2 products - M and N M is manufactured in Department 1 and N in Department 2 The products consume 2 materials - A and B, and also direct labour Details of standard costs and usage are given below:
Standard costs per unit: Material A Material B Direct labour 5.20 per kilo 8.80 per kilo 10.00 per hour
An Example - Scenario
Overhead recovery is on the basis of direct labour hours. Standard usage of materials and labour per unit of product
M Material A Material B Labour 5 kilos 3 kilos 6 hours N 8 kilos 4 kilos 10 hours
An Example - Scenario
Other data: M Forecast units sold Selling price per unit Budgeted closing inventory Budgeted opening inventory 9,000 350 1,500 800 N 6,000 400 700 300
An Example - Scenario
Other data:
Direct Materials Inventories
Material A Material B
700
1,300
600
1,000
3.50/LH 290,000
Required
Draw up the following budgets
Sales Budget Production Budget Direct Materials Usage Budget Direct Materials Purchases Budget Direct Labour Budget Factory Overhead Budget
Sales Budget
Product Units sold Price/unit () Total Revenue ()
M 9,000 350 3,150,000
6,000
400
2,400,000 5,550,000
Production Budget
Dept 1 (M) Dept 2 (N)
Units to be sold Planned closing inv. Total units required Less opening inv. Units to produce
Dept 2
Units (kg) Unit Price 5.20 8.80 Total 266,240 225,280 491,520
Total Units calculated as: Production budget X Kilos per unit = Product M (material A): 9,700 X 5 = 48,500 Kg Product M (material B): 9,700 x 3 = 29,100 Kg (same for product N)
Totals
Total Units (kgs) Total Cost () A B 99,700 54,700 518,440 481,360 999,800
Material B
54,700 1,000
101,000 700
100,300 5.20 521,560
55,700 600
55,100 8.80 484,880
Dept 2
6,400 10 64,000
10.00
582,00
10.00
640,000
End of session 7