Elec 2- Budgeting PDF

**Budgeting** - A realistic plan expressed in quantitative terms for a certain period of time. **Budgeting Report** - It shows the total expenses the company has spent in a particular period. **Budgeting and Forecasting** 1. **Forecasting** - predicting the revenue that the busines...

**Budgeting** - A realistic plan expressed in quantitative terms for a certain period of time. **Budgeting Report** - It shows the total expenses the company has spent in a particular period. **Budgeting and Forecasting** 1. **Forecasting** - predicting the revenue that the business will achieve in a specific period. 2. **Budgeting** - imply planning how and where to allocate resources according to the business goals. **Budgets** are plans expressed in monetary terms. **Budgetary Control** a means by which the actual state of affairs is compared with the budget so that appropriate action may be taken about any deviations before its too late. - Wants - Savings - or Debt Needs **6 Steps of Budgetary control Process** 1. Set financial Objectives 2. Develop a budget 3. Implement the Budget 4. Track Performance 5. Compare Actual Results to Budget 6. Take Corrective Action **Budget Center** Lowest level in an organization for which detailed costs are budgeted. **Budget Committee** Composed of executives in charge of major functions of the business and includes the sales manager, human resources manger, finance manager, production manager, etc. **Key management persons** - responsible for the overall policy matters relating to the budget program and for coordinating the preparation of the budget itself. **Advantages of Budgeting** - Compels and motivates management to make an early and timely study of its problem. - Provides a plan for intelligent use of resources and effective prevention of waste. - Develops an attitude of cost consciousness. **Limitations of Budgeting** - Not exact science, used approximations and judgments - Budget takes time - Employees may not be motivated to support the budget if they feel it is unrealistic or unattainable. **Types of Budget and Other Budgeting Concepts** 1. **The Master Budget** - represents a series of interrelated budgets for all activities of the organization for the budget period. - a master budget is the central financial planning document that includes how a company will spend and how much it expects to earn in a fiscal year. **Three Main Categories of Master Budget:** 1\. Operating Budgets 2\. Capital Expenditures Budgets 3\. Financial Budgets 2. **Continuous (Rolling Budget)** - a budget that is revised on a regular (continuous basis) ***For example***, a company\'s 2023 annual budget will become a rolling budget if, in March 2023, it adds the budget for February 2024 (to replace the February 2023 budget). At this point, the rolling budget will cover all revenue, expenses, and profits from March 1, 2023, through February 29, 2024. 3. **Fixed Budget** - a budget based on only one level of activity (sales or production volume) ***To illustrate*** a fixed budget, let\'s assume that a company pays a 5% sales commission on all of its sales. If the company prepares a fixed budget and it is projecting sales of \$1 million, the budget for sales commissions will be fixed at \$50,000. 4. **Flexible Budget** - a series of budgets prepared for many levels of activity. It is a set of alternative budgets at different expected levels of activity. ***An example*** of a flexible budget would be a business whose rent is always the same (a fixed cost) but whose inventory costs fluctuate (a varying cost) based on sales. The business could use a flexible budget to help plan its finances. 5. **Incremental Budgeting** - a budgeting process wherein the current period\'s budget is simply adjusted to allow for changes planned for the coming period. 6. **Zero-based Budget** activities to be incurred are to be prioritized based on its relevance in line with a goal in the coming period without regard to past experiences or present conditions. 7. **Life Cycle Budget** - costing is done over the entire life span of a product starting from its period of conception to infancy, growth, expansion up to maturity. ***For example***, a company looking to purchase a new piece of machinery might look not only at the initial purchase price but also the energy efficiency, the cost of any needed parts or maintenance, the estimated lifespan of the machine, and the disposal cost at the end of its life.