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• Compel planning
• Communicate ideas and plans
• Coordinate activities
• Provide a framework for responsibility accounting
• Establish a system of control
• Provide a means of performance evaluation
• Motivate employees to improve their performance
CIMA Official Terminology
Budget purposes: 'Budgets may help in:
Authorising expenditure,
Communicating objectives and plans,
Controlling operations,
Co-ordinating activities,
Evaluating performance,
Planning and rewarding performance.
Often, reward systems involve comparison of ACTUAL
with BUDGETED PERFORMANCE.'
A budget, since it has different purposes, might mean different things to
different people.
Forecast
Different
Means of
Target
things to allocating
different Resources
people
Yardstick
Budget: CIMA Official Terminology
A budget is a 'quantitative expression of a plan for a
defined period of time.
It may include planned:
Sales volumes
Revenues
Resource quantities
Costs and expenses
Assets, liabilities and
Cash flows.
Responsibility for budgets
The manager responsible for preparing each budget
should ideally be the manager responsible for carrying
out the budget.
For example, the preparation of particular budgets might
be allocated as follows.
(a) The sales manager should draft the sales budget and the
selling overhead cost centre budgets.
(b) The purchasing manager should draft the material
purchases budget.
(c) The production manager should draft the direct
production cost budgets.
Steps in the preparation of a budget
For example, if sales are the principal budget factor then the production manager
can only prepare his budget after the sales budget is complete.
Developing the Master Budget:
Case of Snowcap Music Festivals
Snowcap is a producer and event manager of destination music events
worldwide.The company prides itself on attracting leading musical talent to its events,
known as SMurFests, while also exposing festival guests to the “next big thing” by
identifying and promoting new talent.The Snowcap brand enjoys exceptional consumer
loyalty: frequent festivalgoers call themselves, naturally, SMurFs and SMurFettes.This
translates into profits through repeat business, strong festival attendance, and significant
merchandise sales. The company works hard to create a stimulating and creative but
safe environment.
As explained by Doug Wing, the core element of this business organization is the
company’s Financial Planning and Analysis (FP&A) system. The FP&A system includes
preparation of a master budget for each of the festivals. These festival budgets are
combined with the headquarters budget to create an overall master budget for Snowcap
Music Festivals. “When we run a festival, we have to commit to everything in advance: how
many bands, what we’ll pay them, how many T-shirts to order, how much cash we’ll need
to borrow or invest, and so on. The master budget is our formal plan for each event and the
overall company. It helps us to achieve our FP&A goals.”
When pressed for specific examples of these,
Wing listed the following:
1. Documenting our plan for operations and financial results. Which festivals are
most and least profitable? How profitable is the company overall? How will we manage
cash flow?
2. Communicating our plans for, and assumptions about, the various festivals. Which
festivals are planned for this year? When does each start and end? How many people
should we plan for at each one?
3. Deciding how to share resources. How many people are needed for marketing? For
operations? At each festival? At headquarters?
4. Controlling operations by developing benchmarks for the financial and operational
results of the festival. How much profit is each festival expected to generate? What is
the goal for T-shirt sales? What is our carbon footprint goal?