Ethical Procedure in

Preparing Budgets
Types of Budget
 Introduction

Planning is the cornerstone of effective management.

BudgetingFormalizes plans and translates qualitative
narratives into a documented, quantitative format
BudgetExpresses a commitment to planned activities and
resource acquisition and use
 Essentials of a Budget

It is prepared in advance as is based on future plan of action

It relates to future period and is based on objectives to be
attained
It is a statement expressed in monetary or physical unit prepared
for the formulation of policy
 The roles of Budget in the Organization

Budget is a detail plan of operations of a specific period of time.

The role of budget to the organization;
Communicate objectives, constraints, and expectations
Provide financial predictions
Provide nonfinancial performance goals and objectives
Identify potential difficulties
Determine resource allocation and constraints
Permit control through budget-to-actual comparisons
 Budgeting

Short term
Top, middle, and operational management involvement
Usable guidelines to implement strategic and tactical plans
Allocates resources
Standard against which performance can be measured
 Functional Budget
Functional budget consists of the following categories of budgets;
Sales budget
Production budget
Material budget
Labour budget
Manufacturing overhead budget
Administrative expenses budget
Selling and distribution budget
Cash budget
Master budget
 Sales Budget

Sales budget is the primary budget.

Other budgets are prepared on the basis of the sales budget
Forecast the future expected sales of the firm
Based on product , type of customer, salesman, locality
Forecast techniques are; past sales, executive judgments,
salesman estimates, plant capacity, raw material, orders on hand,
seasonal fluctuations, competition are also taken into consideration.
 Production Budget

Schedules of production is prepared by breaking large production

into small units to fulfill the target production
A properly operated budget leads to inventory control, improved
maintenance of production schedules and production targets
Example : if the estimated opening stock is 6000units and
estimated sales 30000 units and closing stock of the product is
4000 units.
Therefore the estimated production will be 30000 +3000 6000 =
27000 units
 Material Budget

Materials are basically divided into two categories as direct and

indirect material.
It includes the preparation of estimates of different types of the
raw material needed for various products and purchasing raw
material in required number at required time.
Requirement of raw material is based on companys stocking
policies, price trend and cost of raw material are among the few
factors to be considered.
 Labour Budget

Labour requirement budgets are prepared on basis of production

budget.
In this budget company has to budget the required number of
hours and the expected pay per scales of the employees.
This budget gives information about personnel specifications for
the job for which workers are to be recruited, the degree of skills
and experience required and rates of pay.
 Manufacturing Overhead Budgets

This budget gives the work overhead expenses to be incurred in

a budget period to achieve the production target.
The cost of indirect material and indirect labour can be calculated
with the help of this budget
Variable expenses are estimated on the basis of the budgeted
output because these expenses are bound to change with the
change in output.
 Administrative Expenses Budget

The budget covers the expenses incurred in framing policies,

directing the organization and controlling the business
operations.
In this budget an estimate of expenses is prepared regarding
central office and of the management salaries.
 Selling and Distribution Budget

This budget is used to plan for the expected selling and

distribution expenses of the firm.
It comprises of the cost of transportation, salesman salaries,
commission, bonus etc are few examples
 Cash Budget

This budget focuses on predicting the inflow and outflow of cash

during the budget period.
Cash sales, credit collection and other receipts in cash payment
are considered.
A cash budget makes provision for a minimum cash balance
which will be available at all the times.
 Cash Budget Continue

For cash planning and control

Expected cash inflow and outflow for designed period
Consists of four (4) major sections
Receipts: beginning cash balance, cash collection, from customers,
and other receipts.
Disbursement: comprises of all cash payments
Cash surplus or deficit: difference between cash receipts and cash
payments.
Financing: detailed account of the borrowing and repayments
expected during a specified period.
 Master Budget

The master budget is the aggregation of all lower-level budgets

produced by a companys various functional areas.
It also includes budgeted financial statements, a cash forecast
and financing plan.
It is the overall financial and operating plan
 Budgets Based on Flexibility

These type of budgeting is divided into two categories depend on

the chance to accommodate changes.
These are;
Fixed Budget:
Flexible Budget
 Fixed Budget

This is the rigid budget and it is drawn on the assumption that

there will be no change in the budgeted time period.
A fixed budget will be helpful only when actual level of activity is
equal to budgeted level of activities.
 Flexible Budget

It sometimes known as variable budget.

A flexible budget gives different budgeted costs for different
levels of activities.
This budget is applicable in where activity levels vary from period
to period.
The nature of business is new and it is difficult to predict, industry
is influenced by change in fashion where there are changes in
sales.
 Contrast Between Fixed and Flexible Budgets
Fixed Budget Flexible Budget
It is inflexible and does not change with the It can be recasted quickly according to level of activity
change of the volume of output achieved attained.

It assumes that conditions will remain static
Costs are not classified according to variability e.g.
fixed, variable, semi variable
Comparison of actual and budgeted performance can
not be correct if the volume of output differ.
It has limited application and inefficient tool for cost
control
If the budget and actual activity level vary, the correct
ascertainment of cost and fixation of price became
difficult.
Only one budget at a fixed level activity is prepared due Series of budget are prepared at different level of
to unrealistic expectation on part of management
It designed to change according to changed conditions.
Costs are classified according to nature of their
variability
Comparisons are realistic as the changed plan figures
are placed against the actual ones.
It has more application and can be used as efficient tool
for cost control
It helps in fixation of prices and submission of tender s
due to correct ascertainment of costs.
activity.
 Budget on the Bases of Time Period

This type of budget preparation is classified into two categories

based on time;
Long term budget
Short term budget
 Long Term Budget
A systematic and formalized processes for directing and controlling
operations for period extending beyond one year.
It evaluates future implications associated with present decisions
Long term budget are prepared for those organization which deal
with production lines.
Market trends, change in demographics, national income etc. are
some of important factors to consider in preparing long term budget.
It provides useful information in forecasting and evaluation of an
organization over period of time.
 Short Term Budget

This budgets are prepared for short time periods.

It commonly used by organizations that deals with production of seasonal product
lines.
So they are prepared to cover only production/operation for a specified short time
period.
May cover a periods of three to twelve months depending upon nature of business
It should be long enough to allow completion a season or all aspect of business.
The period should coincide with the financial accounting period to facilitate
evaluation of performance
Example; a budget allocated for manufacturing lots for spring summer season.
 Ethical Issues on Budget Preparation

Task one.
Group Discussion

1. What are the ethical issues to consider while preparing budgets?

2. What other ethical issues that need to be considered on
business operations?
The End