How To Prepare A Budget | Costing
Budgeting – How To Prepare A Budget – A budget plan is a plan for the future, covering a specific period of time usually a year. A budget should be supported by detailed subsidiary plans about how many employees will be required, what quantities of material or stock purchases will be needed, and what plan and machinery running time will be needed.
Budget is essentially a financial plan of expected sales, income, cost and profit. The purpose of a budget includes the following; working plans, formal planning coordination and control. Budget is a working plan which is used as a guide to what should be achieved and for monitoring progress throughout the budget period. It is supposed to be put into use and not to be left in the office drawer.
Budget As Formal Planning – That is to say that it mandates the managers to sit down and articulate what they want to achieve, and what they need to do to achieve their business objectives. It focuses attention on the need to improve profitability or liquidity and on activities that are in critical areas of the future. Budget coordinates efforts of the mangers particularly in big organisations and the budget lays down guidelines for controlling costs and earning revenue.
Sale men are given specific quotas to achieve, and mangers are given budget cost allowances and must maintain the limit of expenditure. It is a yardstick of compared at regular intervals with the estimate budget and any variance could be measured, and in case of abnormal excessive variation, they could be investigated.
Procedures On How Prepared A Budget
- The budget should represent the views of senior management about what business is all about
- The estimated figures should be realistic
- The starting figure is the sales. The decision on how many and at what price should products be sold. The sales will give rise to amount of expenditure to be incurred to support the sales.
- After sales have been budgeted, what follows next is the direct and indirect cost. These figures could be developed through the use of past records.
- Based on the sales and estimated cost, the estimated profit will as well be budgeted that is sales less cost equal to profit.
- When the budget estimates are unsatisfactory the management would have opportunity to revisit the draft budgets and make amendments. Problem areas should be identified and a way of overcoming each problem devised.
- After a satisfactory budgeted profit has been realistically arrival at, the next thing to start thinking of it’s the cash flow forecast.
Costing – Cost is a measure in financial terms of the amount of some resources used for some purposes. Under costing, we have to consider two types namely; Absorbing costing and marginal cost. Remember that marginal costing does not apportion the fixed overhead, whereas Absorption costing apportions the overheads. It is based on the idea that all cost of production should be charged to the cost of the product. The product is said to absorb its proportion of the total cost. Marginal costing highlights contribution that is sales minus variable cost as an indicator of profitability.
In conclusion, we see that budget helps the business to make correction of any mistake along the line. And we should remember that any business that does not prepare budget might fail to see a problem coming and what it eventually arrives, remedies to the problems would not be sought, as it would be already late to save the situation.