Using Cost Data for Planning

Because failure to plan may result in financial disaster.

Deciding on a movement requires both the prediction of results and preparation of necessary resources, which are generally measured in monetary terms. The company predicts the amount of economic benefits to be generated and corresponding resources to be consumed during the budget period; so that the net effect of management’s plans on the company’s financial position and performance is predicted at the beginning.

A budget represents the detailed plan of how the company will acquire and use financial and other resources during the following budget period.

In other words; 

Budget is a quantitative expression of the managements’ plans for a specific period of time, either in physical or financial terms or both.

The procedures applied to prepare the budgets, constitute the budgeting system. A well established budget system primarily works for planning purposes. To support planning, the system purports to facilitate communication and coordination throughout the organization and provide an efficient allocation of resources. The system also represents a feedback aspect by determining targets to reach and controlling for the results at the end of the budget period.

Capital budgeting is the process of evaluating the feasibility of a project, using some indicators such as rate of return, the time needed to pay back, etc.

A master budget is the combination of operational and financial budgets covering all aspects of company’s operations for a period of time.

a. allocating the company’s resources to each operation effectively,
b. communicating the objectives and goals to the subordinates,
c. motivating the superiors and subordinates towards the goals,
d. providing coordination among all divisions or employees,
e. comparing the actual and budgeted results, and take corrective actions, if necessary,
f. taking necessary precautions for the possible bottlenecks that the company may face in the following period.

• Efficient Resource Allocation
• Communication
• Coordination
• Performance Evaluation
• Time Management
• Motivation

Classifications can be made in several aspects such as;
a. Time Coverage
b. Scope of Coverage
c. Level of Considering the Cost Behavior

• Short-term budgets
• Long-term budgets

• Master budget
• Operating budgets
• Financial budgets
• Functional Budgets

• Static (Fixed) budget
• Flexible budget

The first budget to prepare in the budgeting process is the sales budget. It is the quantitative representation
of the expected sales volume for the coming period in terms of both units and Turkish Liras.

Production budget represents the planned volume of production for the following year (or quarters). In order to plan the production, managers should consider expected sales volume, units of beginning inventory, and desired level of ending inventory.

a. Direct materials usage budget
b. Direct materials purchase budget

Bill of materials is a kind of recipe for production. It identifies the use of direct materials in production, including the sequence and required amount of materials to produce each finished unit.

Operating budgets are prepared on an accrual basis; however, company managers need to plan the cash flows in order to pay for purchases and expenses when they come due. At this point, cash collection ability plays a more important role than profitability, because payments cannot be made if the sales are not collected. Therefore, managers use cash budgets that represent the expected cash receipts and disbursements during the budget period.

Financial leverage, is the use of debt in financing the acquisition of new assets. By using debt financing, a return that is generated over equity is increased as well as the tax to pay decreases, because of interest expense.

In this easy-to-implement technique, what managers need to do is just adjusting the current year’s budget for small changes. The fundamental assumption is that all departments will go on their operations at their current level and if any additional amount is required (or a deduction needed), this brings the adjustment for preparing the following year’s budget. A common method for this is to adjust the current year’s items for inflation.

With the kaizen budgets, expectations on continuous improvement are incorporated with the budgeting process. The required amounts of resources are adjusted every time according to the desired levels of efficiency and productivity. Kaizen budgeting approach is much more effective when combined with activity-based budgeting technique.

• Budgetary slack (padding the budget)
• Goal congruence