The budget as an operating plan

Introduction All managements make plans. A group of people not operating under some sort of plan is incoherent, directionless and not an organization. In any organization such as a company operating a business, the leaders (the managers), give much thought to what the objectives should be and the best way of reaching them. Although all …

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Discretionary budget

Definition A discretionary budget is an unspecified lump sum which states what it is for, what the maximum sum overall is to be and possibly specifies also a maximum sum per item. Discretionary budgeting is useful in situations where expenditure for each item is of small value. The administrative cost of dealing with each item …

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Revenue and cash budgets

Definition Revenue budgets are primarily concerned with Sales Income or income generated in other ways. Revenue needs to be scheduled as to when it is expected to come in and how it is to be allocated. This is part of the function of the Cash Budget. Explanation The operating budget is prepared in terms of …

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Manpower Budget Definition

Definition Manpower is the most expensive and complex resource in any business. In a responsibility accounting system, each cost centre manager will specify the people resources available and required to carry out this section of the operation and to prepare the manpower budget. Explanation Employment costs need careful consideration. These are affected by internal factors …

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Project budget

Project Budget Definition and Explanation Projects are long term and may stretch over several annual budget periods. The term ‘project’ is used to indicate, for example, the construction of a building rather than a one-off major purchase, normally covered in the capital budget. The long-term project budget has many difficulties, among the cost escalation and …

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Operating Budget

Parts of Operating Budget The operating budget has two parts: a ‘program’ budget and a ‘responsibility’ budget. Both arrive at the same figure for projected net income and return on investment. i. The program budget This describes the major programs that the company plans to undertake. This budget is arranged by product line and shows …

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Profit Planning

Definition of Profit Planning Profit planning aims to set a profit objective for a budgeting period. Also, to establish the main policy decisions on how to achieve the objectives. The profit objective will normally be related to the ‘return’ required on the investment in the business. Profit planning evaluates alternatives to select the most likely …

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Performance Budgeting (PB)

Performance budgeting involves the development of refined management tools (such as work measurement performance) so as to achieve the specific goals of the business over a period of time. The emphasis in performance budgeting is on the improvement of internal management, keeping in view the volume of work and its cost, that has to be …

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Zero-based Budgeting (ZBB)

What is Zero-based Budgeting? – Definition In the Zero-based budgeting approach, all organizational activities are initially set to zero. Zero-based Budgeting is the newest approach to Budgetary Planning and Control. It was successfully developed and implemented in the seventies by Peter A. Phyrr. The approach became further popular when President Jimmy Carter, in 1979, required its use …

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Implementation of budget

The implementation of budget is the responsibility of the budget director. The success of the entire exercise of budgeting depends on two important factors. First, proper and clear communication to all key people involved in the implementation of the budget. They should clearly know what is expected of them and how to achieve the goals. …

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Budgeted Statement of Financial Position (Balance Sheet)

Definition The budgeted statement of financial position depends upon the various individual budgets which have been prepared. The budgeted income statement and the cash inflow or outflow position must be known clearly before the budgeted statement of financial position can be prepared. Also, all the other transactions during the year as shown in the period budgets must …

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Budgeted Income Statement

The data from the different budgets prepared earlier is put together to prepare the budgeted income statement to show whether the profits as reflected in the budgets can be realized or not. The cost of goods sold is prepared from the information in the direct material, direct labor, and factory overhead budgets. The sales’ budget …

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Cash Budget

Cash Budget – Definition The cash budget is an estimate of cash receipt and its payment during a future period of time. It deals with other budgets such as materials, labor, overheads and research and development. The cash budget is a statement of receipt and payment of cash during a specific time. It is a …

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Selling Expenses Budget

The selling expense budget is the responsibility of the sales department and includes selling expenses like sales salaries, sales commissions, advertising, sales office rent, shipping expenses, sale supplies etc. The selling expenses may be both fixed and variable.

The Manufacturing Cost Budget

The Direct Materials Budget, the direct labor budget, and the manufacturing overhead budget make up the Manufacturing cost Budget. Each of the three budgets is explained in brief below: Direct Material Budget The materials required for the production schedule are estimated. Purchases are then made of the materials required depending upon the production cycle. Also, …

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Production Budget

Production Budget – Definition A manufacturing firm develops a production budget, which shows the number of units of products to be manufactured. This is based on forecast sales, adjusted for planned inventory levels. Based on the production budget, a manufacturer develops cost budgets for the direct materials, direct labor and overhead that will be required …

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Sales Budget

What is a Sales Budget? The starting point for the preparation of all other budgets is the Sales Budget. Sales predictions are made which are based on an analysis of past sales and an estimate of future economic prospects. Sales from past years are usually broken down by product line, regions, and sales-people. Management tries …

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What is a budget period?

Budgets are normally drawn up for a year, with the year being divided into quarters or months. In some cases, budgets are drawn up on the basis of an operating cycle — complete tracing of activity from the time it is started until it is ended. The budget usually corresponds with the fiscal year so …

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Basic Principles of an Effective Budget

Preparation of an organization’s budget forces management to look ahead and to analyze the various inter-relationship in a business. It requires that the entire management team work together to carry out the plans. The comparison of the actual performance with the budgeted one summarises the investigation of differences which serve as feedback for future planning …

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What is a budget and budgeting process?

Budget – Definition A budget is a detailed plan, which shows the financial consequences of an organization’s operating activities for a specific future period of time. A budget acts as a financial model that summarizes future operations and it is usually viewed as a core component of an organization’s planning and control system. Budgeting Process …

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