COST AND MANAGEMENT ACCOUNTING

BUDGETING
Purposes of Budgeting Systems
Budget
a detailed plan, expressed in measureable terms, specifying how resources
will be acquired and used during a specified period of time.

BUDGETING METHODOLOGIES
Budgets are organization tools that have been playing a key element
of business control systems.
Companies use the budget to summarise plans for the coming year
on the basis of financial statements.
It offers a platform for measuring managerial performance and
applying controls to ensure that strategy and objectives are realised.

Purchases Budget
A purchases budget report allows business owners to determine how
much money and goods are needed to reach desired goals. This
particular budget is used for companies that have products in stock or
inventory, as the value of inventory plays a large role in a complete
purchases budget.
Cash Budget
The cash budget starts with the beginning cash balance to which is
added the cash inflows to get cash available.
Cash outflows for the period are then subtracted to calculate the cash
balance before financing.
If this balance is below the company's required balance, the financing
section shows the borrowings needed.
Production budget
The production budget shows the number of units that must be
produced.

 To budget for annual production, three things must be known:

1. the number of units to be sold,
2. the required level of inventory at the end of the year, and
3.the number of units, if any, in the beginning inventory.

Flexible Budgets
A flexible budget shows what costs should be for various levels of
activity. The flexible budget amount for a specific level of activity is
determined differently depending on whether a cost is variable or fixed.
If a cost is variable, the flexible budget amount is computed by
multiplying the cost per unit of activity by the level of activity specified
for the flexible budget.
If a cost is fixed, the original total budgeted fixed cost is used as the
flexible budget amount.
Flexible Budgets
Static budgets are prepared for a single, planned level of activity.
Performance evaluation is difficult when actual activity differs from the
planned level of activity.
'Zero-Based Budgeting - ZBB'
A method of budgeting in which all expenses must be justified for each
new period. Zero-based budgeting starts from a "zero base" and every
function within an organization is analyzed for its needs and costs.
Budgets are then built around what is needed for the upcoming period,
regardless of whether the budget is higher or lower than the previous
one.
ZBB allows top-level strategic goals to be implemented into the
budgeting process by tying them to specific functional areas of the
organization, where costs can be first grouped, then measured against
previous results and current expectations.
'Zero-Based Budgeting - ZBB'
Because of its detail-oriented nature, zero-based budgeting may be a
rolling process done over several years, with only a few functional
areas reviewed at a time by managers or group leadership.
Zero-based budgeting can lower costs by avoiding blanket increases
or decreases to a prior period's budget. It is, however, a timeconsuming process that takes much longer than traditional, cost-based
budgeting.