Budgeting Concepts and Methodologies Application & Awareness 1 BUDGET- CONCEPTS AND METHODOLOGIES WWW.CMAEXAMSTUDY.COM WWW.IMANET.ORG 2
Agenda Introduction of 3FOLD Budget Budgeting Role, Process and Approaches Questions related to Budget Standard Cost and How to Develop Standard Cost Various types of Budget Budget Methodologies 3 About Us Your ultimate resources for Exam Preparation for CMA Our mission is to foster a culture of Life Long Learning in working professionals using our world-class blended learning model. Established in 2008, 3FOLD Education Centre is the market leader in preparing students for international certification examinations. Our Educational Services Permit is issued by KHDA! Over the last 9 years we have trained thousands of students in our classroom training programs and also delivered world s first MOOC (Massive Open Online Course) by a private training institutes to more than 4000+ students from 100+ countries around the world. Our Affiliations: PMI Registered Education Provider ASQ Registered Service Provider CQI IRCA Approved Training Partner AACEI Approved Education Provider IMA Approved Course Provider 4
Welcome Onboard! Hi Everyone, Greetings from 3FOLD Education Centre! We thank you for choosing us to help achieve your certification goals. Rest assured that you made the right choice! 5 We love to hear from you! Go ahead and drop us a line. We value your feedback! Feedback We believe in continuous improvement. Drop us a line, whether it is a positive feedback, suggestions for improvements or complaints, we will take it seriously and take action. Logon to /feedback 6
Training Disclaimer These materials are intended to assist employers, employees, and others as they strive to understand the concept of Budget. While we attempt to thoroughly address specific topics, it is not possible to include discussion of everything necessary to ensure compliance. Thus, this information must be understood as a tool for addressing issues related to Budget, rather than an exhaustive statement. Likewise, to the extent that this information references practices or procedures that may enhance compliance, but which are not required by a statute, regulation, or standard, it cannot, and does not, create additional legal obligations. Finally, over time, regulators may modify rules and interpretations in light of new technology, information, or circumstances; to keep apprised of such developments, or to review information on a wide range of Budget topics, you can visit regulatory web sites or contact your auditor or legal consultant. 7 BUDGET 8
BUDGET The budget is a planning tool. Written plan for the future that forces management to evaluate the assumptions and the objectives identified in the budgeting process. Companies that prepare budgets anticipate problems before they occur. Budget is a control tool. Reveals the efficient or inefficient use of company resources. Budgetary slack (overestimation of expenses) must be avoided if a budget is to have its desired effects. The budget is a motivational tool. The budget is a means of communication. 9 BUDGETING ROLE, PROCESS & APPROACHES BUDGET ROLE Planning is the process by which an organization sets specific goals for itself and sets about pursuing those goals. BUDGET PROCESS Process is up and down the organization. BOD formulates mission statement. Senior management translate mission statement into a strategic plan. Budget committee/department composed of top management is formed to draft the budget calendar and budget manual. Middle and lower management submits their departmental budgets and submits to the budget committee. TOP DOWN BUDGETING Top down budgeting is imposed by upper management and therefore has less of a chance of acceptance by those on whom the budget is imposed. BOTTOM UP BUDGETING Bottom up budgeting is characterized by general guidance from the highest levels of management, followed by extensive input from middle and lower management. 10
QUESTION RELATED TO BUDGET Define Budget Slack? Participation might result in padding of the budget, also known as budgetary slack with excess of resources budgeted over the resources or management may create slack by overestimating costs and underestimating revenues. What are the time frames for budget? Strategic (10 years or more), Intermediate (up to 2 years), Operational (1 month to 1 year). "Budgeting's role in formulating and controlling short term objectives: Lays out specific revenue targets and expense limitations for each functional area and department on a month to month basis. T/F? TRUE 11 QUESTION RELATED TO BUDGET What is the role of budgets in measuring performance against established goals:? One of the most important reasons for adopting a budget is to provide guideposts for the assessment of success or failure on the part of individual managers and functional areas. What is the role of budgets in monitoring and controlling expenditures:? Analysis of variances reveals the efficient or inefficient use of company resources.. "What are the characteristics of a successful budgeting process? Sufficient lead time (budget planning calendar), budget manual (should be prepared in a standard format), and buy in at all levels. 12
QUESTION RELATED TO BUDGET What are the effects of external factors on the budgeting process:? Dependent on general economic conditions and their expected trends as well as well as the availability of financial resources. Industry situation Define controllability in the budget process? The extent to which a manager can influence activities and related revenues and costs. Can be difficult to isolate because few costs or revenues are under the sole influence of one manager. Must be kept in mind when the budget is used as the basis of managerial evaluation. Accommodation of change is a key characteristic of successful budgeting. T/F? TRUE 13 STANDARD COST AND HOW TO DEVELOP STANDARD COST Standard costs are predetermined expectations about how much a unit of input, a unit of output or a given activity should cost. HOW TO DEVELOP "Activity analysis: determining the resources and steps that go into the production process aids in the development of standard costs. Historical data may be used to set standards by firms that lack the resources to engage in the complex task of activity analysis. For direct materials- there is often a direct relationship between unit price and quality. Standards can be set up using top down or the bottom up approach. 14
TYPES OF BUDGET Master Budget: The master budget, comprehensive budget, encompasses the organization's operating and financial plans for a specified period. Operating Budget: "Emphasis is on obtaining and using current resources. Sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, ending finished goods inventory budget, COGS budget Financial Budget: Emphasis is on obtaining funds need to purchase operating assets 15 TYPES OF BUDGET Sales Budget: First budget prepared because sale volume affects production and purchasing levels, operating expenses, and cash flows. Outgrowth of the sales forecast. Sales budget must specify both projected unit sales and dollar revenues. Production Budgets: "based on sales in units plus or minus desired inventory buildup or reduction. Concerned with units only. Prepared for each department and each item: raw materials, direct labor budget, factory overhead budget. Purchases Budget: Can follow after projected sales have been set. Inventory should be at an appropriate level to avoid unnecessary carrying costs. 16
TYPES OF BUDGET Expense Budgets:: Prepared by department heads using the sales budget as a basis. Based on prior years' costs and adjusted for anticipated changes in prices, wages, and sales volume estimates. Capital Budget:: Equipment purchases are technically not part of the operating budget, but they must be incorporated into the preparation of the cash budget and pro forma financial statements. Should be prepared moer than a year in advance to allow sufficient time to plan financing of major expenses and receive custom orders of specialized equipment. Cash Budget: Most important part of a company's budget program. Cash budget details projected cash receipts and disbursements. Facilitates loans and other financing. 17 BUDGET METHODOLOGIES Project Budget Consist of all cost association to a particular project. The costs and profits associated with it are significant enough to be tracked separately. Activity Based Budgeting Applies activity based costing principles to budgeting. Involves defining the activities that drive indirect costs. Budgeted cost for each pool is determined by multiplying the demand for the activity by the estimated cost of a unit of the activity.. Zero Based Budgeting Budget and planning process in which each manager must justify his or her department's entire budget every budget cycle. Differ from incremental budgeting in which the current year's budget is simply adjusted to allow for changes planned for the coming year. Must build the budget every year from a base of zero. Begins with the deepest budgetary units of the entity. For each budgetary unit, a decision package is prepared that describes various levels of service that may be provided including at least one level of service lower than the current one. 18
BUDGET METHODOLOGIES Continuous (Rolling) Budgeting Revised on regular basis. Budget for an additional month or quarter in accordance with new data ast eh current month or quarter ends. Advantage: rolling budget requires managers to always be thinking ahead. Disadvantage: amount of time constantly spend on budget preparation. Direct Labor Budget Direct labor budget depends on wage rates, amounts and types of production numbers and skill levels of employees to be hired. Employee Fringe Benefits: Must be derived once the cost of wages has been determined. Full per hour cost of labor can now be determined by total project direct cost divided by the direct labor hours 19 BUDGET METHODOLOGIES Ending Finished Goods Inventory Budget End result will have a direct impact on the pro forma balance sheet Cost of Goods Sold Budget Combines the results of the projections for the three major inputs (materials, labor, overhead). Budgeted gross margin can be calculated by sales - COGS Variable Costing and Contribution Margin CM is the amount left over from sales after subtracting variable costing. Amount available for contributing to the covering of fixed costs and providing a profit. Variable costing basis includes only those costs that vary directly with the level of production. 20
BUDGET METHODOLOGIES Break Even Point Formula Breakeven point = total fixed cost/ contribution margin per unit Non -Manufacturing Budget The variable and fixed portions of selling and administrative costs must be treated separately. Includes individual budgets for R&D, design, marketing, distribution, customer service and administrative costs. Cash Collections Schedule: Projected cash collections schedule is used to estimate the inflows of cash from customer payments. Cash Budget Preparation Combines the results of the operating budget with the cash collection and disbursement schedules to produce a comprehensive picture of where the company's cash flows are expected to come from and where they are expected to go 21 Q&A 22
Contact us Abu Dhabi Dubai 104, Al Saqr Tower, Corniche Road, Khalidiyah, Abu Dhabi 104, Al Safa Business Centre, Zabeel Road, Karama, Dubai P: 02-6670660 P: 04-3999551 Email: online@3foldtraining.com 23 End of Training 24