Budgeting

Overview of Budgeting

Understand the concept of budgeting as a key financial planning tool used by businesses.
Comprehend the process involved in preparing a budget, including setting objectives, gathering data, and consolidating all financial forecasts into a formal plan.
Recognise the importance of a budget in controlling and monitoring business performance.
Identify the various types of budgets such as operating budget, financial budget, and capital expenditure budget.

Gain knowledge on operating budgets which incorporate sales budget, production budget, direct materials budget, direct labour budget, and overhead budget.
Understand financial budgets such as cash budget, budgeted income statement, and budgeted balance sheet.
Learn about the role of capital expenditure budgets in forecasting a company’s future investments in fixed assets and capital improvements.
Be familiar with the concept of master budget, as a comprehensive budgeting plan that includes all the aforementioned types of budgets.

Comprehend the sequence in which budgets are prepared, usually starting with sales budget and ending with cash budget and budgeted statement of financial position.
Understand the concept of budgetary slack and its potential implications on a firm’s performance.
Know that budgeting involves both quantitative analysis and management judgement.

Understand the concept of zero-based budgeting (ZBB), a method that involves preparing the budget from scratch each time and justifying each expenditure.
Recognise the advantages and disadvantages of zero-based budgeting compared to traditional budgeting methods.
Grasp that zero-based budgeting aims to prevent budgetary slack and wasteful spending, thereby ensuring cost efficiency.

Understand the role of budget variance analysis in identifying differences between the budgeted and actual results.
Learn how to compute and interpret budget variances, and appreciate the importance of investigating significant variances.
Know the difference between favourable variance and unfavourable variance.
Be familiar with the concepts of flexible budget and fixed budget, and their relevance in variance analysis.

Recognise the behavioural aspects of budgeting and how it affects managers’ and employees’ performance.
Understand that while budgets are essential for planning and control, they might also cause problems like creating undue pressure, promoting short-termism, and encouraging dysfunctional behaviour if not properly managed.
Appreciate the importance of participative budgeting, where managers who are directly responsible for achieving budget targets are involved in setting those targets.