Budgetary Planning and Control

I. PURPOSE AND NATURE OF THE BUDGETING PROCESS

1. The purpose and nature of the budgeting process:

2.1 The nature of budgeting:

a. Definition of budget:

Budget is defined as “a quantitative statement for a defined period of time, which may include planned revenue, expenses, assets, liabilities and cash flows” (BPP Professional Education Management Accounting, 2004, p.155).

b. The differences between budget and plan, budget and standard costing

Budget | Plan |

-Budget is usually prepared for a short period, for quarter or one year. -The budget looks at the financial stage needed to support achieving the company’s goals.-The budget provides financial information about the resources needed to make appropriate business decisions. | -a plan is set out for more general and long term, from two to five years-Strategic plan shows the direction and goals of the company as well as guidelines for actions to achieve those goals (Carol Wiley, n.d.).-The plan focuses more on the direction and methods to carry out the business goals effectively. |

Budget | Standard costing |

-The budget is set for total volume of activity and total cost.-Budgeting is carried out based on standard costs. | -Standard cost uses the unit cost in inventory control and valuation. |

c. Types of budget:

There are three main types of budget: operating budget, financial budget and flexible budget.

* Operating budget includes:

Sales budget, production budget, manufacturing cost budget, selling and administrative expense budget and budgeted income statement (Ms. Giang’s study documents, 2012).

* Financial budget includes:

Capital expenditure budget, cash budget and budgeted balance sheet (Ms. Giang’s study documents, 2012).

* Flexible budget is set for a single activity level and at relevant range (BPP Management Accounting, 2004, p.168). Flexible budget shows the variances between static budget and actual result. Hence, it is designed to change as activity...