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BUDGET:
A budget is a plan for the future. Hence, budgets are planning tools, and
they are usually prepared prior to the start of the period being budgeted.
However, the comparison of the budget to actual results provides valuable
information about performance. Therefore, budgets are both planning tools
and performance evaluation tools.
1. Establish objectives
A budget is a quantitative plan for the future that assists the organization in
coordinating activities. All large organizations prepare budgets. Many
organizations prepare detailed budgets that look one year ahead, and budgets
that look further into the future that contain relatively less detail and more
general strategic direction.
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Assignment No.2 Use of Various Techniques of
Budgeting
Planning
The budgeting process ensures that managers do plan for future operations,
and that they consider how conditions in the next year might change and
what steps they should take now to respond to these changed conditions.
This process encourages managers to anticipate problems before they arise,
and hasty decisions that are made on the spur of the moment, based on
expediency rather than reasoned judgment will be minimized.
Coordination
The budget serves as a vehicle through which the actions of the different
parts of an organization can be brought together and reconciled into a
common plan. Without any guidance, managers may each make their own
decisions, believing that they are working in the best interests of the
organization.
Communication
Motivation
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Assignment No.2 Use of Various Techniques of
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The budget can be a useful device for influencing managerial behavior and
motivating managers to perform in line with the organizational objectives. A
budget provides a standard that under certain circumstances, a manager may
be motivated to strive to achieve.
Control
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Assignment No.2 Use of Various Techniques of
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Sales budget
The Pickup Trucks Company Sales Budget For the Year Ended December 31, 20X1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Units 15,000 17,000 28,000 40,000 100,000
Selling Price Rs.15 Rs.15 Rs.15 Rs.15 Rs.15
Total Sales Rs.225,000 Rs.255,000 Rs.420,000 Rs.600,000 Rs.1,500,000
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Assignment No.2 Use of Various Techniques of
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In addition to annual and quarterly sales budgets, monthly budgets are often
prepared so sales can be tracked against expectations more frequently than
once every three months.
Manufacturing costs
Before preparing the direct materials, direct labor, and manufacturing
overhead budgets, the production budget must be completed.
Production budget. The production budget shows the number of units that
must be produced. To budget for annual production, three things must be
known: the number of units to be sold, the required level of inventory at the
end of the year, and the number of units, if any, in the beginning inventory. If
quarterly budgets are required, this same information is needed on a
quarterly basis. Using the Pickup Trucks Company's quarterly sales budget
and given that 15% of the next quarter's sales volume must be on hand
before the quarter begins, the production budget by quarter can be prepared.
Further assumptions are a 10% increase in sales in quarter one of next year
compared to the current year's quarter-one sales and 2,250 units in inventory
at the beginning of the year.
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Assignment No.2 Use of Various Techniques of
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plus the spare tire mounted on the side), at a cost of Rs.0.50 per tire, the raw
materials purchases budget calculates 501,890 tires required at a cost of
Rs.250,945. The units in the production budget are adjusted for units in
ending and beginning inventories, multiplied by five (number of tires per
pick up) to determine total tires to be purchased and then multiplied by
Rs.0.50 to determine the cost of the tires needed. As a reminder, the
production budget showed the following units for 20X1:
Units
Quarter 15,300
1
Quarter 18,650
2
Quarter 29,800
3
Quarter 36,475
4
Total
100,22
5
Pickup Trucks Company Raw Materials Budget For the Year 20X1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Units to be produced 15,300 18,650 29,800 36,475 100,225
Number of tires per unit ×5 ×5 ×5 ×5 ×5
76,500 93,250 149,000 182,375 501,125
Required ending 9,325 14,900 18,238 8,415 8,415
inventory
Total units required 85,825 108,150 167,238 190,790 509,540
Beginning inventory (7,650) (9,325) (14,900) (18,238) (7,650)
Units to purchase 78,175 98,825 152,338 172,552 501,890
Cost per unit × × × × ×
Rs.0.15 Rs.0.15 Rs.0.15 Rs.0.15 Rs.0.15
Cost of raw materials Rs.11,726 Rs. 14,824 Rs. 22,851 Rs. 25,883 Rs. 75,284
purchases
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Assignment No.2 Use of Various Techniques of
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This process is repeated for all the other raw material components used in
producing a pickup truck.
Direct labor budget. The direct labor budget shows the number of direct
labor hours and the cost of the labor to determine the total cost of direct
labor. Assume it takes one-half hour of labor to put together one pickup
truck and each labor hour costs Rs.14.00. The total direct labor budget is for
50,113 (100,225 units × .5 hours per unit) hours at a cost of Rs.701,575
(Rs.14.00 per hour × 50,113 hours). The break out by quarter is shown in
the following table.
Pickup Trucks Company Direct Labor Budget For the Year 20X1
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Units to be 15,300 18,650 29,800 36,475 100,225
produced
Direct labor hours × .5 × .5 × .5 × .5 × .5
per unit
Total direct labor 7,650 9,325 14,900 18,237.5 50,112.5
hours
Cost per hour × × × × ×
Rs.14.00 Rs.14.00 Rs.14.00 Rs.14.00 Rs.14.00
Cost of direct Rs.107,100 Rs.130,550 Rs.208,600 Rs.255,325 Rs.701,575
labor
Pickup Trucks Company Manufacturing Overhead Budget For the Year 20X1
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Sales Commission
Expense
Sales Rs.225,000 Rs.255,000 Rs.420,000 Rs.600,000 Rs.1,500,000
Commission Rate 4% 4% 4% 4% 4%
Sales Rs.9,000 Rs.10,200 Rs.16,800 Rs.24,000 Rs.60,000
Commissions
Delivery Expense
Units Sold 15,000 17,000 28,000 40,000 100,000
Cost per Unit Rs.0.10 Rs.0.10 Rs.0.10 Rs.0.10 Rs.0.10
Delivery Expense Rs. 1,500 Rs. 1,700 Rs. 2,800 Rs. 4,000 Rs.10,000
Pickup Trucks Company Selling Expenses Budget For the Year 20X1
Variable Expenses
Sales Commissions Rs. 9,000 Rs.10,200 Rs.16,800 Rs.24,000 Rs. 60,000
Delivery Expense 1,500 1,700 2,800 4,000 10,000
Total Variable Expenses 10,500 11,900 19,600 28,000 70,000
Fixed Expenses
Sales Salaries 12,500 12,500 12,500 12,500 50,000
Total Selling Expenses Rs.23,000 Rs.24,400 Rs.32,100 Rs.40,500 Rs.120,000
Pickup Trucks Company General and Administrative Expenses Budget For the Year
20X1
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Variable Expenses
None
Fixed Expenses
Salaries Rs.15,000 Rs.15,000 Rs.15,000 Rs.15,000 Rs.60,000
Rent Expense 3,750 3,750 3,750 3,750 15,000
Office Supplies 1,500 1,500 1,500 1,500 6,000
Total General and Rs.20,250 Rs.20,250 Rs.20,250 Rs.20,250 Rs.81,000
Administrative Expenses
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Assignment No.2 Use of Various Techniques of
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CASH BUDGETING
The cash budget indicates how much cash the company will have on hand at
the end of each period, and also indicates when the company will need to
borrow funds to cover temporary cash shortfalls, and when the company will
have excess funds to invest in short-term financial instruments.
The cash budget is one of the most important planning tools that an
organization can use. It shows the cash effect of all plans made within the
budgetary process and hence its preparation can lead to a modification of
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budgets if it shows that there are insufficient cash resources to finance the
planned operations.
ZERO-BASED BUDGETING
In the normal budgeting process, the previous year's level of expenditure is
often assumed to have been appropriate. The task of individuals preparing
the budget is to decide what activities and funds should be added or
subtracted. Such a process builds into an organization a bias towards
continuing the same activities year after year.
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FLEXIBLE BUDGETING
A flexible budget is a budget that is prepared for a range i.e. for more than
one level of activity. The flexible budget is also known as a variable,
dynamic, sliding scale, step budget. The underlying principle for a flexible
budget is that every business is dynamic and ever changing. Thus, a flexible
budget is developed for a range, say 8000-10000 units of production. Under
this approach, if the actual production is 9000 units compared to the
projected amount of 10000 units, the manager uses the flexible budget to
project the costs for 9000 units of output in place of the budgeted 10000
units. The flexible budget covers a range of activity, is easy to change with a
variation in production levels, and thus facilitates correct performance
measurement and reporting.
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