BUDGETARY PLANNING AND CONTROL

BUDGETARY PLANNING AND CONTROL

Nature and Purposes of Budgets

Budgeting refers to the process of quantifying the plans of an organization so as to enable it achieve its objectives in the defined period.  The result of the process is budgets, which are used for cost control, performance evaluation and future decision making.

Budgets may be prepared for departments, functions or financial and resource items. In fact, some people refer to budgeting as a means of coordinating the combined intelligence of the entire organization into a plan of action.

OBJECTIVES OF BUDGETARY PLANNING

1)      Coordination

The budgetary process requires that visible detailed budgets are developed to cover each activity, department or function in the organization.    This is only possible when the effort of one department’s budget is related to the budget of another department.  In this way, coordination of activities, function and department is achieved.

2)      Communication

The full budgeting process involves liaison and discussion among all levels of management.  Both vertical and horizontal communication is necessary to ensure proper coordination of activities.

3)      Control

This is the process for comparing actual results with the budgeted results and reporting upon variances.  Budgets set a control gauge, which assists to accomplish the plans set within agreed expenditure limits.

4)      Motivation

Budgets may be seen as a bargaining process in which managers compete with each other for scarce resources.  Budges set targets, which have to be achieved.  Where budgetary targets are tightly set, some individuals will be positively motivated towards achieving them.

5)      Clarification of Responsibility and Authority

Budgetary process necessitates the organization of a business into responsibility and budget centres with clear lines of responsibilities of each manager.  This reduces duplication of efforts.

6)      Planning

It is by Budgetary Planning that long-term plans are put into action.  Planning involves determination of objectives to be attained at a future predetermined time.  When monetary values are attached to plans they become budgets.

Limitations of Budgeting

·         Too much reliance may cause resistance (inflexibility) to change.

·         Difficult to set levels of attainment.  This may result into too tight budgets that cause loss of morale.

·         Antagonism where budgets exert undue pressure.

·         Budgeting control is a terminate exercise and therefore any report from investigation of variances may b of little use to the current operations.

PREPARATION OF BUDGETS

THE MASTER BUDGET FRAMEWORK

The master budget is the overall quantifications of the budgeting plan.  In it, functional budgets are incorporated.  A functional budget is a budget if income and/or expenditure for a particular function.  The master budget therefore combines all the budgets of the various departments in an organizations.  It is useful in ensuring that all the individual budgets are consistent with one another and also presents a ‘unit’ picture of the entire organization.

It is made up of both production and non-production budgets.

Production budgets include: ·         Sales Budget ·         Finished Goods Budgets ·         Material budges ·         Labour budgets ·         Overheads budgets. Non-Production Budgets Include ·         Selling & Distribution ·         Administration Budget ·         Cash Budget ·         Research and Development – Capex ·         All these budgets translate into the projected profit and loss a/c and the budgeted Balance Sheet. Illustration Venus plc produces two products Niks and Args.  The budget for the next year to 31st 20X8 is to be prepared.  Expectations for the forthcoming year includes the following: Venus PLC BALANCE SHEET AS AT 1 APRIL 20X7 Fixed Assets                   Shs                                           Shs          Shs Land and buildings 45,000 Plant and Equipment  (NBV) 112,000 Current Assets Raw materials 7,650 Finished goods 23,615 Debtors 19,500 Cash                       4,300 55,065 Current Liabilities Creditors 6,800 Taxation   24,500 (31,300)    23,765  180,765 Financed by 150,000 ordinary shares of Shs1 each 150,000 Retained profit   30,765 180,765 (b) Finished Products NIKS ARGS The Sales Director has estimated the following: (i)    Demand for the Co’s products 4,500 units 4,000 units (ii)   Expected S.P per unit Shs32 Shs44 (iii)  Closing stock @ 31 March 20X8 is required to be 400 units 1200 units (iv)  Opening stocks at 01 April 20X7 900 units 200 units (v)   Unit cost of this opening stock will be Shs20 Shs28 (vi)  The amount of plant capacity required for each              product is:            Machining 15min 24min                                     Assembling 12min 18min (vii)  The raw material content per unit is                         Material A 1.5 kg 0.5 kg                                     Material B 2.0 k g 4.0 kg (viii) Direct labour hours required @ unit of each          product is: 6 hrs 9 hrs Finished goods are valued at FIFO basis at full factory cost. (c) Raw Materials Material A Material B (i) Closing stock requirements kilos at 31 March 20X8 600 1000 (ii) Opening stock at 1 April 20X7 kilos 1100 6000 (iii) Budgeted cost of raw materials per kilo Shs1.50 Shs1.0 Actual cost per kilo of opening stocks are as budgeted cost for the coming year. (d) Direct Labour The standard wage rate of direct labour is Shs1.50/hr. (e)   Factory overhead Factory overhead is absorbed on the basis of machining hours with separate absorption rates for each department. The following are expected overheads in the production cost centre budgets. Machinery Deport Assembly Deport Shs Shs Supervisors salaries 10,000 9,150 Power 2,400 2,000 Maintenance and running costs 2,100 2,000 Consumables 3,400 500 General Expenses  19,600    5,000  39,500   18,650 Depreciation is taken at 5% straight-line on plant and machinery equipment.  A machine costing the company Shs20,000 is due to be installed on 1 October 20X7 in the machining department which already has machinery installed to the value of Shs100,000 at cost. (f) Selling and distribution expenses Shs    Sales commission and salaries 14,300 Traveling distribution 3,500 Office salaries 10,100 General administration expenses 2,500 30,400 (g) There is no opening or closing work in progress and inflation should be ignored. Required Prepare the following budgets for the year ended 31 March 20X8 for Venus PLC. i)            Sales budget ii)          Production budget  (units) iii)        Plant utilization budget iv)        Direct materials utilization budget v)          Direct labour budget vi)        Factory overhead budget vii)      Direct materials purchases budget viii)    Cost of goods sold budget ix)        Budgeted profit and loss account Solutions Venus PLC (i)                                  Sales Budget Qty (units) Revenue (Shs) NIKS 4,500 144,000*1 ARGS 4,000 176,000*2 TOTALS       320,000  (ii)                      Production Budget (units) NIKS (units) ARGS (units)             Sales 4,500 4,000 Add:    Closing Stock 400 1,200             Total requirements 4,900 5,200 Less:    Opening stock    (900)    (200) Production budget    4,000    5,000 (iii)                                              Plant Utilization Budget Machinery Assembling NIKS (4,000 units) *3 1000 hrs 800 hrs ARGS (5000 units) *4                 2000  1,500                   TOTAL PLANT UTILIZATION    3,000 hrs   2,300 hrs *3 = 4000 x ;                            4000 x *4 = 5000 x ;                            5000 x (iv)                                   Direct Material Uses Budget Units @ Material A @ Material B NIKS    4,000 1.5 6,000 2.0 8,000 ARGS    5,000 0.5 2,500 4.0          20,000 Total Direct Materials  8,500 kg  28,000 kg USAGE (v)                                  Direct Materials Purchases Budget Mat A (kg) Mat B (kg)             Current usage          8,500              28,000 Add:    Closing stock             600                1,000             Total Req          9,100              29,000 Less:    Opening stock (1,100) (6,000)             Material To Be Purchased (Kg)          8,000              23,000             Cost per Kg. Shs1.5 Shs1.0             Material purchase             Budget Shs    12,000    23,000 (vi)                       Direct Labour Budget         Hrs NIKS 4000 x 6 24,000 ARGS 5000 X 9 45,000 Direct Labour hrs 69,000 Standard Wage rate/hr               Shs 1.6 Direct Labour Cost Budget Shs 110,400 Factory Overhead Budget Machining Department (Shs) Assembly department (Shs)             Budgeted Overheads ex 39,500 18,650             Cluding depreciation Add:    Depreciation Less:    Existing plant *5                                          5,000 4,350             New plant *6                                             500 - Total budgeted overheads 45,000 23,000 Absorption Base (Machine hrs) 3,000 2,300 Overhead Absorption Rate *7                        Shs1.5/mach hr Shs 10 mach hr *5 = 100,000 x 5%;                  87,000 x 5% *6 =   20,000 x 5% x *7 = ;                             (viii)                     Cost of goods sold budget   Niks (Shs)          Args (Shs)             Opening stock (WI) 18,000 5,600 Add:    Production (WII) 78,400 140,750 Less:    Closing stock (WIII)       7,840      33,780             Cost of goods sold 88,560 112,570 Workings I:                      Opening stocks Niks:                900 x 20          =          18,000 Args:                200 x 28          =            5,600 II           PRODUCTION COST PER UNIT OF FINISHED PRODUCT NIKS ARG Materials:         A 1.5 x 1.5 2.25 0.5 x 1.5 0.75                         B 2.0 x 1.0 2.0 4.0 x 1.0 4.0 Labour:            6hrs x 1.6 9.6 9 hrs x 1.6 14.4 Overheads Machining 15 x 3.75 15 x 6.0 Assembly 10 x          2.0 10 x        3.0 Total production @ unit Shs19.6 28.15 Production Units        4000       5000 Valuation   78400    140750 III              CLOSING stock valuation NIKS ARGS Closing stock units 400 1200 Unit cost    19.6     28.15 Stock units   7840    33780 (iv)                        BUDGETED PROFIT AND LOSS ACCOUNT NIKS (Shs) ARGS (Shs) TOTAL (Shs)             Sales 144000 176000 320000             Cost of goods sold    88560   112570    201130 Gross Profit 55440 63430 118870 Less:    Selling and administrations expenses 30400 Net Profit         88470