BUDGETING AND
BUDGETARY CONTROL
WHAT IS BUDGETING?
The process of allocating funds and monitoring of actual performance
against budget.
A plan of future activities with monetary
implications
PURPOSES
A budget committee will comprise of the divisional heads, the chief operating
officer and the group accountant.
Their major task is to ensure that budgets are realistically established, and they are
coordinated satisfactorily.
Functions of the budget committee:
1. Coordinating the budget preparation and issuing the budget manual.
2. Preparing and issuing the timetable for the preparation of budgets.
3. Allocating the responsibilities for the preparation of functional budgets.
4. Assisting in the preparation of budget by providing information.
5. Communicating the final budget.
6. Comparing the actual performance with the budget.
7. Continuous assessing the budgeting and planning process.
The essential characteristics for a budgeting function to be effective
are as follows:
1. Sound organizational structure with clearly defined authority and
responsibilities,
2. Realistic goals,
3. Accepted by all levels of management.
4. Periodic review of budget with actual performance, and
5. Corrective actions.
1. Incremental budgeting
The previous year’s budget will be taken as a base. When preparing the
budget, the budget holder will add a certain percentage to allow for the
changes in costs or revenue. There may also be other adjustments for
specific items to be made in the current budget.
Incremental budgeting is a type of a budgeting process that is based on the
idea that a new budget can best be developed by making only some
marginal changes to the current budget.
In other words, with incremental budgeting, the current budget is used as a
base to which incremental assumptions are added or subtracted from the
base amounts to determine new budget amounts.
2. Zero-based budgeting
All transaction and production elements are re-evaluated when budgets
are about to be drawn up. The approach starts from zero as if there is no
past record and that the budget is now prepared for the very first time.
Therefore, budget preparers need to justify every expense there is in
the budget proposed.
Zero-based budgeting (ZBB) is a method of budgeting in which
all expenses must be justified for each new period. The process of zero-
based budgeting starts from a "zero base," and every function within an
organization is analyzed for its needs and costs.
The budgets are then built around what is needed for the upcoming period,
regardless of whether each budget is higher or lower than the previous one.
3.Activity-based budgeting
A budgeted statement of proposed activities for the future, by
incorporating expected or budgeted costs and revenue. The orientation
is based on ABC with emphasis on cost pools and cost driver rates for
apportioning overheads to the activities and later to the products.
Activity-based budgeting is a budgeting system in which you record and
analyze every activity that creates a cost to find areas for improving
efficiencies. After analyzing costs, you can create a budget based on your
findings. Activity-based budgeting is more comprehensive than traditional
budgeting since it involves additional calculations. This budgeting type aims
to reduce costs and improve efficiency, not just track expenses or adjust
information based on inflation or other related occurrences.
4. Participative budgeting
Participative budgeting allows empowerment, where it is a budgeting
system in which all managers contribute their inputs in setting their
own budgets..
Participative budgeting is an effective budgeting method that allows
organizations to give their staff a sense of ownership and control.
Introducing this process allows businesses to minimize loss by better
understanding their departments' economic needs.
Participative budgeting is a budgeting process in which the people who are
in the lower levels of management are involved in the budget preparation
process.
participative budgeting shares the responsibility with lower-level managers
to give them a sense of ownership in the business.
Budgetary Slack
Budgetary slack refers to planned misstatement of costs and
revenues.
This situation must be prevented if a budget is to materialize.
Misleading the projected costs and revenues is a behavioural
problem that is unethical.
Management should be aware that when budget
information is obtained by consulting the subordinates,
there is a tendency to provide a cushion or a pad to the
budget set.
Budgetary slack is the practice of overestimating the expenses
and/or underestimating the projected revenues when
preparing a budget statement for the next financial period.
It is a cushion created by management or lower-level
managers to prepare budget estimates that will not be hard to
achieve.
BUDGETARY CONTROL SYSTEM
Budgetary control is a system of controlling costs which includes the
preparation of budgets, coordinating the various departments, and
establishing responsibilities to achieve maximum profitability.
1. Sales Budget
• Shows the expected sales that are likely to be achieved for a certain future period of time.
• It is the first budget to be prepared
2. Production Budget
• Shows the expected numbers of units to be produced by considering the stocks level that have
to be maintained.
3. Direct Materials Budgets
• Shows the movement of the raw materials in terms of purchase, by taking into account the stocks
level required for the materials.
• The materials needed to produce the products is establish based on the type and quantity required.
• The amount material to be purchased is determined from the cost of material, to arrive at the total
costs involved.
4. Direct Labour Budget
• Shows the required labour hours with the associated costs.
5. Manufacturing Overhead Budget
• Lists the expected manufacturing overhead expenses to be incurred. Eg indirect materials,
indirect labour, supervisor’s salaries, factory rent and depreciation of factory machines.
6. Selling and Distribution Budget
• Provides the expected expenses to be incurred for selling and distribution purposes.
• Its listed various expenses that can be categorized under selling & administration expenses Eg
office rental, postage, telephone bills
Sales Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
x Selling Price (RM) 20 30
Sales value (RM) 400,000 900,000
Sales Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
x Selling Price (RM) 20 30
Sales value (RM) 400,000 900,000
Sales Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
x Selling Price (RM) 20 30
Sales value (RM) 400,000 900,000
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Material Usage and Purchase Budgets for AUG 2020
Material A Material B
Rose (18,750)@ 2 or 1 37,500 18,750
Cactus(29,750)@2.5 or 1.5 74,375 44,625
Total material usage: 111,875 63,375
(+) Closing inventory 9,000 8,000
(-) Opening inventory 8,000 7,250
Total material purchase 112,875 64,125
Purchase price (RM) 2 1.2
Purchase value (RM) 225,750 76,950
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750
DLH per unit 2 3
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Budget for AUG 2020
Rose Cactus
Sales (unit) 20,000 30,000
(+) Closing inventory 5,000 2,000
25,000 32,000
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Overhead Costs Budget for AUG 2020
Rose Cactus
Variable MOH (W1) 75,000 178,500
Fixed MOH (W2) 6,649 10,551
TOTAL PRODUCTION OVERHEAD COST 81,649 189,051
Direct Labour Budget for AUG 2020
Rose Cactus
Production unit 18,750 29,750 Working 1:
DLH per unit 2 3 Rose = 37,500 x RM 2 = RM75,000
Cactus = 89,250 x RM2 = RM178,500
Total labour hours: 37,500 89,250
Rate per hour (RM) 4 5
Total labour cost (RM): 150,000 446,250
Production Overhead Costs Budget for AUG 2020
Rose Cactus
75,000 178,500
Variable MOH (W1)
Fixed MOH (W2) 6,649 10,551
TOTAL PRODUCTION OVERHEAD COST 81,649 189,051
Production Budget for AUG 2020
Rose Cactus Working 2:
Sales (unit) 20,000 30,000 Total production unit = 18,750 + 29,750 = 48 500
(+) Closing inventory 5,000 2,000 Rose = 18750 / 48,500 x RM17200 = RM6,649
25,000 32,000 Cactus = 29,750 / 48,500 x RM17,200 = RM10,551
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Overhead Costs Budget for AUG 2020
Rose Cactus
75,000 178,500
Variable MOH (W1)
Fixed MOH (W2) 6,649 10,551
TOTAL PRODUCTION OVERHEAD COST 81,649 189,051
Production Budget for AUG 2020
Rose Cactus Working 2:
Sales (unit) 20,000 30,000 Total production unit = 18,750 + 29,750 = 48 500
(+) Closing inventory 5,000 2,000 Rose = 18750 / 48,500 x RM17200 = RM6,649
25,000 32,000 Cactus = 29,750 / 48,500 x RM17,200 = RM10,551
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production Overhead Costs Budget for AUG 2020
Rose Cactus
75,000 178,500
Variable MOH (W1)
Fixed MOH (W2) 6,649 10,551
TOTAL PRODUCTION OVERHEAD COST 81,649 189,051
Production Budget for AUG 2020
Rose Cactus Working 2:
Sales (unit) 20,000 30,000 Total production unit = 18,750 + 29,750 = 48 500
(+) Closing inventory 5,000 2,000 Rose = 18750 / 48,500 x RM17200 = RM6,649
25,000 32,000 Cactus = 29,750 / 48,500 x RM17,200 = RM10,551
(-) Opening inventory 6,250 2,250
Total Production unit: 18,750 29,750
Production budget
JANUARY FEBRUARY MARCH
Sales quantity 100 √ 150 √ 180 √
(+) Closing inv. 70 √ 90 √ 110 √
(-) Opening inv. (50) √ (70) √ (90) √
Production quantity 120 170 200
Production budget
JANUARY FEBRUARY MARCH
Sales quantity 100 √ 150 √ 180 √
(+) Closing inv. 70 √ 90 √ 110 √
(-) Opening inv. (50) √ (70) √ (90) √
Production quantity 120 170 200
Production budget
JANUARY FEBRUARY MARCH
Sales quantity 100 √ 150 √ 180 √
(+) Closing inv. 70 √ 90 √ 110 √
(-) Opening inv. (50) √ (70) √ (90) √
Production quantity 120 170 200
Production budget
JANUARY FEBRUARY MARCH
Sales quantity 100 √ 150 √ 180 √
(+) Closing inv. 70 √ 90 √ 110 √
(-) Opening inv. (50) √ (70) √ (90) √
Production quantity 120 170 200
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg) JANUARY FEBRUARY MARCH
Total material Sales quantity 100 √ 150 √ 180 √
36 √ 51 √ 60 √
required: (+) Closing inv. 70 √ 90 √ 110 √
(+) Closing inv. 15 √ 10 √ 5√ (-) Opening inv. (50) √ (70) √ (90) √
(-) Opening inv. 20 √ 15 √ 10 √ P r o d u c t i o n
120 170 200
Total material quantity
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg)
Total material
36 √ 51 √ 60 √
required:
(+) Closing inv. 15 √ 10 √ 5√
(-) Opening inv. 20 √ 15 √ 10 √
Total material
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg)
Total material
36 √ 51 √ 60 √
required:
(+) Closing inv. 15 √ 10 √ 5√
(-) Opening inv. 20 √ 15 √ 10 √
Total material
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg)
Total material
36 √ 51 √ 60 √
required:
(+) Closing inv. 15 √ 10 √ 5√
(-) Opening inv. 20 √ 15 √ 10 √
Total material
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg)
Total material
36 √ 51 √ 60 √
required:
(+) Closing inv. 15 √ 10 √ 5√
(-) Opening inv. 20 √ 15 √ 10 √
Total material
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Material purchase budget
JANUARY FEBRUARY MARCH
Production
120 √ 170 √ 200 √
quantity
x Material usage
0.3 0.3 0.3
per unit (kg)
Total material
36 √ 51 √ 60 √
required:
(+) Closing inv. 15 √ 10 √ 5√
(-) Opening inv. 20 √ 15 √ 10 √
Total material
31 46 55
purchase (kg)
Cost per kg (RM) 12 12 12
Total material
372 √ 552 √ 660 √
purchase (RM)
Direct labour budget
JANUARY FEBRUARY MARCH
Production quantity 120 170 200
x DLH per unit (hour) 3 3 3
Total DLH required 360 √ 510 √ 600 √
x Rate per hour (RM) 8 8 8
Direct labour cost (RM) 2080 √ 4080 √ 4800 √
JANUARY FEBRUARY MARCH
Sales quantity 100 √ 150 √ 180 √
(+) Closing inv. 70 √ 90 √ 110 √
(-) Opening inv. (50) √ (70) √ (90) √
P r o d u c t i o n
120 170 200
quantity
Direct labour budget
JANUARY FEBRUARY MARCH
Production quantity 120 170 200
x DLH per unit (hour) 3 3 3
Total DLH required 360 √ 510 √ 600 √
x Rate per hour (RM) 8 8 8
Direct labour cost (RM) 2080 √ 4080 √ 4800 √
Direct labour budget
JANUARY FEBRUARY MARCH
Production quantity 120 170 200
x DLH per unit (hour) 3 3 3
Total DLH required 360 √ 510 √ 600 √
x Rate per hour (RM) 8 8 8
Direct labour cost (RM) 2880 √ 4080 √ 4800 √
