Budgets for planning and control - Part 1

BUDGETS FOR PLANNING AND CONTROL

Why we do budgets? Why it is important to the organization? The topic we are learning is the combination from two subjects namely Management and Accounting. That is why when we merged it together, a subject called Management Accounting comes to live.

The management basic processes are POLC that is Planning, Organizing, Leading and Controlling, whereas the Accounting is the process of relaying financial information to its users. We combined all those together we would have a proper planning or forecasting and implementation the best method in production hence producing viable important numbers that could aid the decision making of an organisation.

One of those is Budgets. Of course people like to spend and they will spend on whatever they think are suitable and relevant to them. Satisfying their needs and wants. But with the limited resources (scarcity), they have to plan. They have to based on the historical data to forecast the future. For example, if you want to sell something, you need to make a sales projection consisting of how many units you want to sell. From the projection, then you need to estimates the raw material usage, the direct labour used and other related cost associated with the sales. All are costs. Say, everything has been counted for, then you need to make a cash budget estimating how much money you need for the implementation process.

Let’s look at the simple example….

Sales of Product STU       1,000 units

Selling price/unit             RM150

Direct material for making product STU

 - Material AA        5 units@RM2.50 unit

 - Material BB        2 units@RM1.50 unit

Direct labour         3 hours@RM5.00 per hour

Overheads            RM1.50 per direct labour hour

Cash available at the beginning RM80,000

Prepare;

1.   Sales budget

2.   Direct material budgets

3.   Direct labour budgets

4.   Overhead budgets

* assume the is no opening stock for any of them.