Objectives of Budgeting
• Budgeting is common among businesses
• Budgeting is also commonly used in Not for
Profit (NFP) organizations
• Budgeting is also commonly used and quite
extensive in all levels of government
Objectives of Budgeting
• Budgeting is a critical part of the overall
management of an organization.
• Planning takes two forms:
– Strategic Planning
– Strategic planning is long term focused
– Operational planning
– Operational planning is focused on the current
• Strategic planning has five steps.
1. Define the company’s purpose, vision and
2. Set Specific performance goals.
3. Formulate a strategic plan to achieve purpose,
vision and mission.
4. Implement the strategic plan.
5. Reevaluate the plan and make necessary
• Once plan is in place use it to direct
• Each budgetary unit of an organization is
called a responsibility centre.
• Each responsibility centre is led by a
manager with the authority and
responsibility over the unit.
• Budgets help establish goals.
• Feedback provides information on results.
• If results are not achieving goals need to
take corrective action.
• Budgets are not just a planning tool.
• Budgets are also a motivational tool.
• Objectives should be difficult but
• Objectives set too high are discouraging.
• Objectives set too low are also not
• Static budgets.
– Static budgets show expected results of a
responsibility centre for only one activity level.
– This is a major disadvantage of static budgets.
• Flexible budgets.
– Show expected results of a responsibility center
for several activity levels.
• Manufacturing operations require several
• Pro forma (budgeted) income statement
– Sales Budget
– Cost of Goods Sold Budget
– Selling and Administrative Budget
Cost of Goods Sold Budget
• Cost of Goods Sold Budget is comprised of:
– Production budget
– Direct materials purchases budget
– Direct labour cost budget
– Factory overhead cost budget
• Master budget also includes a Pro forma
(budgeted) balance sheet.
• The budgeted balance sheet is comprised of:
– Cash budget.
– Capital expenditures budget.
• Uses estimated cash receipts
• Also uses estimated cash disbursements
• Develop a budget of estimated receipts
• Usually done on a monthly basis
• Uses sales data and past collection practices to
estimate cash receipts
• Typical analysis would be:
– 25% of sales are for cash
– Of the remaining 75% , 50 % will be collected in the
following month and the rest in two months
• Usually based on manufacturing costs
• Payments are also based on past experience
• Assume that labour costs are paid in the
• Assume purchases are paid in the following
• Use estimates of sales and multiply by unit
• Often combines information from different
• See Exhibit 7 on P.959.
• Sales Budget is the starting point
• Use information from sales budget to determine
• Production budget relies on following formula:
Expected units of sales
+ Desired units in ending inventory
- Estimated units in beginning inventory
Total units to be produced
• Assume the following for Model XR
+ Desired ending inventory 200,000
- Estimated beginning inventory 100,000