Budgeting
In general, budgeting is estimating of estimating both revenue and expenditure for the expected financial term, which may then be further broken into different divisions of quarters and months for ongoing review. With the use of a budget, one can determine the present level of capital available, generate accurate income estimates, and plan for costs. Business organisations may concentrate on improving cash flows, cost reduction, and financial KPIs with the aid of budgeting. The budget ensures the business's ability to achieve its goals and participate in making sound financial decisions to achieve its goals and participate in making sound financial decisions is ensured by the budget. Using a budget, you can ensure a budget, you can make sure that funds are being spent on initiatives that advance the company's strategic goals. Budgeting forecasts revenue and expenditures for a future period based on current internal and external resources. A comprehensive analysis of forecast financial results is generated by taking into account inputs from various levels. Budgeting is divided into personal, corporate, government, static, flexible, master, operating, cash, financial, and labour subcategories. Budgeting techniques include incremental, zero-based, activity-based, participatory, negotiated, and value proposition.
A budget is an estimate of revenue and spending for a given period of time that is used by governments, corporations, and individuals of all income levels.
Budgeting is a methodical approach to forecasting the revenues and expenditures of a person, family, organisation, commercial entity, or government. A realistic budget assists organisations in tracking their financial success which is critical for decision-making.
A budget is essentially a financial plan for a specific time period, usually a year, that is recognised to considerably improve the performance of any financial activity.
Aside from allocating resources, a budget may help formulate goals, monitor outcomes, and plan for eventualities.
Personal budgets are incredibly helpful in managing an individual's or family's money in the short and long term.
Example
XYZ Ltd produces Product A, the standard costs of which are:
Sales Revenue £40
Direct labour (1 hour per unit) (12)
Direct materials (1 kg per unit) (15)
Fixed overheads (5)
Standard profit 8
The budgeted output for the month was 1,000 units.
however, the actual production was 1,100 units sold for £43,500. There were no inventories.
at the start or end of the month.
The actual production costs were:
Direct labour (1,070 hours) £15,000
Direct Materials (1,250 kg) 13,455
Fixed overheads 6,000
Calculate the budget variance for the month from the available information and use them to reconcile the budgeted and actual profit figures.
Standard and flexible budget, and actual cost analysis
Budgeted Cost(£) Unit Flexible Budget Actual cost incurred
Output 1000 cost Output 1100 Output 1100
Sales revenue 40000 40 44000 43500
Direct labour 12000 12 13200 1100 hr 15000 1070
Direct materials 15000 15 16500 1100 kg 13455 1250
Fixed overheads 5000 5 5500 6000
Operating profit 8000 8800 9045
Variance analysis
Sales variance
Volume
(8000 -8800) 800 F Price
(43,500-44,000) -500 F
Direct labour vairnace
Efficiency
(1100-1070) x12 360 F
Rate
(1070x12)-15,000 -2160 A
Direct Material variance
Usage
(1100-1250)x15 -2250 A
Price
(1250x15)-13455 5295 F
Fixed overhead variance Expenditure
5500-6000 -500 A
*F = Favourable variance
*A =Adversevariance
Reconciliation of budgeted and actual operating profit
Budgeted operating profit 8000
Sales
Volume (F) 800
Price (A) -500 300
Direct labour
Efficiency (F) 360
Rate (A) -2160 -1800
Direct Material
Usage (A) -2250
Price (F) 5295 3045
Fixed overhead A -500
Total Variance ------ 1045
Actual operating profit 9045