BUDGET AND BUDGETARY
CONTROL
NEW TOPIC
BUDGET
Is a quantitative statement for a defined period of time, which may
includes planned revenues, expenses, assets, liabilities and cash flows.
A budget provides a focus for an organization aids the coordination of
activities and facilitates control.
FUNCTIONS OF BUDGET
Planning and achieving objectives
Coordinating
Motivation
Control
Performance evaluation and responsibility accounting
Communicating
To increase profitability
To ensure optimum utilization of resources
BUDGETARY CONTROL
• Is a system of procedures used to ensure that an organization’s actual
revenues and expenditures adhere closely to its financial plan.
WHAT ARE THE DIFFERENCES BETWEEN
BUDGET AND BUDGETARY CONTROL
BUDGET BUDGETARY CONTROL
Is an estimation of revenues and cost for Is a process where budgets are prepared
a period. at the beginning of the accounting period
to compare and analyze the actual results
at the end of accounting period.
Preparation of the budget occurs prior to Decisions relating to the budgetary
the beginning of the accounting period. control will be taken at the end of the
accounting period.
Estimation of revenues and costs will be Both estimations and actual revenues and
included in budget. costs will be included in budgetary
control.
Characteristics of a Budget
Participation
Comprehensiveness- embrace the whole organization
Standards- base it on established standards of performance
Flexibility- allow for changing circumstances
Feedback- constantly monitor performance
Analysis of cost and revenues- this can be done on the basis of product
lines, departments of cost centers.
ADVANTAGES OF BUDGETING AND
BUDGETARY CONTROL
Promotes coordination and communication
Provides a basis for performance appraisal(variance analysis)
Motivates employees by participating in the setting of budget
Improves the allocation of scarce resources
Enables remedial action to be taken as a variance emerge
ESSENTIALS OF A GOOD BUDGET
Budget must address the enterprises goals
Budget must be a motivating tool
Budget must have the support of management
Budget should be flexible
STAGES OF BUDGET PREPARATION
Establishing the main objective(s)
Identifying constraints/ identifying the limiting factor(s)
Obtaining plans and estimates from budget centers
Examining, discussing and coordinating plans and estimates
Aggregating plans and estimates to give a draft budget
Acceptance and approval of budget
TYPES OF BUDGET
Top down budget- Non participatory of operational managers/ lower
level
Bottom up budget- Participatory budget
Incremental Budget- use of actual results of the previous year budget
to predict future.
Flexible budget
Fixed budget
Rolling budget eg. MTEF 2020/21, 2021/22.
Cash Budget
CASH BUDGET
Is an estimation of cash flows(inflow and outflow) of a
business over a specific period of time.
This could be for weekly, monthly, quarterly or annually.
This budget is used to assess whether the entity has sufficient
cash to continue operating over a given time frame. The cash
budget provides a company insight into its cash need( and
any surplus) and helps to determine an effective allocation of
cash
FORMAT OF CASH BUDGET
MCHUZI WA NYOKA PLC
CASH BUDGET FOR A FIRST QUARTER IN YEAR 2023.
DETAILS JANUARY FEBRUARY MARCH
TZS TZS TZS
CASH RECEIPTS XX XX XX
RECEIPTS FROM DEBTORS
LOAN RECEIVED XX XX XX
PROCEEDS FROM ISSUE OF
XX XX XX
SHARE
SALES OF CAPITAL ITEMS XX XX XX
TOTAL RECEIPTS (A)
CASH PAYMENTS XXX XXX XXX
PAYMENT TO CREDITORS
WAGES AND SALARIES XX XX XX
CAPITAL EXPENDITURE
DIVIDEND XX XX XX
TOTAL PAYMENTS (B) XX XX XX
A-B
OPENING CASH BALANCE XX XX XX
CLOSING CASH BALANCE XX XX XX
XXX XXX XXX
Example 1
Age limited is an electronic company operating in Dar es Salaam Tanzania.
The company imports flash disks from China and sales to a different retailers
all over the country. Recently, the company want to expand its business and
approaches AMC Bank for a loan of Tshs. 2,000,000. The Bank requested the
company to submit the cash budget for period of a January to justify the
company’s ability to repay the requested loan. The balance at the start of the
month is Tsh. 250,000; The following forecasted information relates to the
company’s operations in January 2023.
Revenue from January is Tsh. 1,300,000.
Proceeds from issue of share Tsh. 500,000
Disposal of Flash disc Tsh. 700,000
Dividend is Tsh. 200,000
Repayment of loan Tsh. 150,000
Continue……
Taxation amounting to Tsh 300,000 on each quarter
Acquisition of Flash disc Tsh. 700,000
Electricity and telephone charges amounting to Tshs. 200,000
Salaries and wages are currently Tsh 750,000 per month
Administration cost amounting to Tsh 200,000 incurred each month
Required.
Prepare a cash budget for the Company for the month of January 2023.
Example 2
Mchuzi wa Nyoka limited is car dealer operating in Dar es Salaam
Tanzania. The company imports used cars from China and sales to a
different retailers all over the country. Recently, the company want to
expand its business and approaches CRDB Bank for a loan of Tshs.
6,000,000. The Bank requested the company to submit the cash budget
for period of a three consecutive months to justify the company’s ability
to repay the requested loan. The balance at the start of the January is
Tsh. 1,550,000; The following forecasted information relates to the
company’s operations in 2023.
Continue………
Salaries and wages
January Tsh. 300,000
Februar Tsh. 400,000
March Tsh. 500,000
Rent Tzs. 200,000 per month
Interest on Loan Tzs 75,000 is due on each quarter
Capital investment is Tzs 300,000 as planned and paid in March
In February 2023, the company expect to purchase some engines costing
Tzs 500,000
Electricity and telephone charges amounting to Tshs. 100,000 each month
Continue…..
Administration cost amounting to Tsh 200,000 incurred each month
Revenue from January is Tsh. 1,300,000, February Tsh. 900,000 and
Tsh. 500,000
Proceeds from issue of share Tsh. 700,000 in February
Disposal of cars in March Tsh. 200,000
Dividend paid is Tsh. 600,000 in March
Required.
Prepare a cash budget for the Company for the three months 2023.
Flexible Budget
Is a budget that takes into account changes in sales volume. It
determines the variability of the cost along with the level of activity.
The aim of this budget is to control the cost.
During the preparation of flexible budget, costs are analysed as fixed,
variable and semi- variable costs.
Usefulness.
For control purpose
Is suitable for organization where it is difficult to forecast the demand
for the product
Useful for managerial decisions
Problems
Difficult to ascertain the range of activity
Analyzing the cost behavior i.e. variability, is a time consuming affairs
Example
Prepare a budget for 2011 for a direct labour cost and overhead
expenses of a producton department at the activity levels of 80%, 90%
and 100% using the information listed below and ignoring inflation.
The direct labour hourly rate is expected to be TZS 3.75
100% activity represents 60000 direct labour hours
Variable indirect labour cost TZS 0.75 per DLHs
Variable consumable supplies cost TZS 0.375per DLHs
Variable canteen cost 6% of direct and indirect labour cost
Continue…….
Semi- variable costs are expected to relate to DLHs in the same manner
as for the last five years.
YEAR DIRECT LABOR HOUR SEMI VARIABLE COST IN
TZS
2006 64,000 20,800
2007 59,000 19,800
2008 53,000 18,600
2009 49,000 17,800
2010 40,000 16,000
Continue……
Fixed cost:
Depreciation Tzs. 18,000
Maintanance Tzs. 10,000
Insurance Tzs. 4000
Rent Tzs. 15,000
Management salaries Tzs. 25,000
