Module VI

Budget Preparation

Objectives
To understand the characteristics of Budget. To analyze the uses of budgets in the organization. To analyze Operating Budget and the content of the Operating Budget. To analyze other types of budgets. To understand Budget Preparation Process.

Nature of Budget
Budgets are an important tool for effective short-term planning and control in organization. An Operating Budget usually covers one year and states the revenue and expenses planned for that year. It has certain characteristics like: - a budget estimates the profit potential of the business unit. - It is stated in monetary terms, although the monetary amounts may be backed by the non-monetary items like units produce and sold. - It generally covers a period of one year except the seasonal businesses.

Contd.
- It is a management commitment, managers agree to accept responsibility for attaining the budgeted objectives. - The budget proposal is reviewed and approved by an authority higher than the person preparing the budgets. - Once approved the budgets can be changed only under specified conditions. - Periodically, actual financial performance is compared to budget, and variances are analyzed and explained. - The budget is different from strategic planning and forecasting.

Uses of Budget
1.
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Preparation of an operating budget has four principal purposes. Fine Tuning the Strategic Plan:
the strategic plan of the last year can help the managers in preparation of the budgets. And budget preparation also provide an opportunity to make decisions that will improve performance before a commitment is made.

2.
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Coordination:
Every responsibility center manager participates in the budget preparation process. Managers individual planning are come together here and the inconsistencies may shown up. Thus, with the help of this group work the inconsistencies are identified and resolved.

Contd.
3. Assigning Responsibility: - the approved budget should make clear what each manager is responsible for and with the budgets allocated to different departments. 4. Basis for Performance evaluation: - The budget assigns responsibility to each manager and against the budgeted performance the actual performance is judged.

Operating Budget
The operating budgets can be for the whole organization or for the business units which can be classified as per the responsibility centers. Typically it includes: revenues, production cost and cost of sales, marketing expense, logistic expenses, general and administrative expenses, R&D expenses, net income. Revenue Budgets: a revenue budget consist of unit sales projection multiplied by expected selling prices. The revenue budget is very important but most critical also as it is relying on forecasted data. The revenue budget is usually is based on forecasts of some conditions for which the sale manager is not held responsible, for e.g economic conditions.

1. -

Contd.
2. Budgeted Production cost and cost of sales: - This budget plans the volume level of a standard mix of products. - The production manager makes plans for obtaining quantities of material and labor. - The budgeted cost developed by the production manager may not be for the same quantities of products as those shown in sales budget, the difference represents additions or subtractions from the finished goods inventory. 3. Marketing expenses: - marketing expenses will include the advertisement, training to sales people, etc. - There are logistics expenses as well like warehousing, order picking, transportation, and collection of accounts receivables.

Contd.
4. General and Administrative expenses: A part of discretionary expenses. 5. Research and Development Expenses 6. Income Taxes Other Budgets 1. Capital Budget 2. Budgeted Balance Sheet 3. Budgeted Cash Flow Statement

Budget Preparation Process

1. Organization: Budget Preparation: the budget department, reports to the corporate controller and performs different function like; Publishes procedures and forms for the preparation of budget Coordinates and publishes the basic assumptions for the budget preparation. Make sure that information is provided properly to all the departments Provides assistance in budget preparation Analyses the proposed budgets Administer the process of budget preparation around the year Analyses the reported performance against the budget, interprets the results, and prepares summary reports for senior management. The budget committee consists of members of senior management, and performs different functions.

Contd.
2. Issuance of guidelines 3. Initial budget proposal: considering internal and external factors 4. Negotiation 5. Review and approval 6. Budget Revisions - Contingency Budgets