C1.

Purpose of Budgeting
 Introduction
• A budget is a quantified plan of action for a forthcoming accounting
period, which may include planned revenues, expenses, assets, liabilities and cash
flows'.
• is a plan of what the organisation is aiming to achieve and what it has set as a target.
• A forecast is an estimate of what is likely to occur in the future.
 The objectives of a budgetary planning and control
system are:
1. To ensure the achievement of the organisation's objectives
2. To compel planning in line with the objectives of the organisation
3. To communicate ideas and plans to individual managers
4. To coordinate the different activities so that managers are working towards the
same common goal
5. To evaluate the performance of management
6. To establish a system of controlling costs by comparing actual results with the
budget
7. To motivate employees to improve their performance and beat targets

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 Planning and Control Cycle
• Stage 1: Set Mission
This involves establishing the broad overall aims and goals of the organisation – its
mission may be both economic and social.
Most organisations now prepare and publish their mission in a mission statement.
• Mission statements often include the following information:
1. Purpose and aim(s) of the organisation
2. The organisation's primary stakeholders: clients/customers, shareholders,
congregation, etc.
3. How the organisation provides value to these stakeholders, for example by
offering specific types of products and/or services
Stage 2: Identify Objectives Stage 3: Search for possible courses of
a) This requires the company to specify action
objectives towards which it is • A series of specific strategies should be
working. developed.
• Strategy is the course of action, including
b) The objectives chosen must be
the specification of resources required, that
quantified and have a timescale the company will adopt to achieve its
attached to them. specific objective.
Objectives should be SMART: • To formulate its strategies, the firm will
• Specific consider the products it makes and the
markets it serves.
• Measurable
• Achievable
• Relevant
• Time limited
• Stage 4: Gathering data about
alternatives and measuring pay-
offs
• Stage 5: Select course of action
Having made decisions, long-term
plans based on those decisions are
created.
• Stage 6: Implementation of short-
term (operating) plans
– This stage shows the move from
long-term planning to short-term
plans – the annual budget.
– The budget provides the link
between the strategic plans and
their implementation in
management decisions.
• Stage 7: Monitor actual outcomes
Detailed financial and other records of actual performance are compared with
budget targets (variance analysis)
• Stage 8: Respond to divergences from plan
This is the control process in budgeting, responding to divergences from plan either
through budget modifications or through identifying new courses of action

Quiz
 The administrative procedures used in the budgeting
process
a) Budget centres:
Units responsible for the preparation of budgets. A budget centre may encompass
several cost centres.

b) Budget committee:
This may consist of senior members of the organisation, Every part of the organisation
should be represented on the committee, so there should be a representative from sales,
production, marketing and so on. Functions of the budget committee include:
• Coordination of the preparation of budgets, including the issue of a manual
• Issuing of timetables for preparation of budgets
• Provision of information to assist budget preparations
• Comparison of actual results with budget and investigation of variances
 c) Budget Officer :
Controls the budget administration The
job involves:
• liaising between the budget committee
and managers responsible for budget
preparation
• dealing with budgetary control
problems
• ensuring that deadlines are met
• educating people about budgetary
control.
Quiz
d) Budget manual:
This document, which is usually prepared
by the management accountant:
• charts the organisation
• details the budget procedures
• contains account codes for items of
expenditure and revenue
• timetables the process
• clearly defines the responsibility of
persons involved in the budgeting
system.
 Stages in the Budgetary Process
• Stage 1: Communicating policy guidelines to preparers of budgets
• Stage 2: Determining the factor that restricts output – Principal Budget
Factor
• Stage 3: Preparation of a budget using the principal budgetary factor
• Stage 4: Initial preparation of budgets
• Stage 5: Co-ordination and review of budgets
• Stage 6: Final acceptance of budgets
• Stage 7: Budget review

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