Dr. George Andrew Gekas
These notes are posted on blackboard to high light and complement certain aspects
of the topic, facilitate those students who may have missed my lecture, balance
traditional with internet based learning and overall enhance student=s learning.
The notes are not meant to suggest what may be in the exams, replace textbook
studying and/or problem solving.
A budget is a detailed outline of how resources will be acquired and used over a specific
period of time. It is an orderly, quantitative plan of action for a future period of time.
Every organization small, big, in the private or public sector needs a budget.
Reasons for preparing a budget
1. It compels right planning.
2. It formalizes the planning process.
3. It communicates the set objectives to others and promotes co-ordination among
the organizations sub-units.
4. It provides criteria for evaluation performance.
5. It uncovers potential troubles.
Types of Budgets
A budget period is important as it establishes different types of budgets.
A. Capital budget
It is usually a long-term budget of expenditures for fixed assets. Capital budgets are
focused on the Balance Sheet and the Statement of Changes in Financial Position.
B. Operating budget
It is for the short term, usually an annual budget. Operating budgets are focusing on
Income Statement items.
C. Perpetual budget
It is a continuous 12-month budget whereby each month a month is added in place of the
month that has expired.
A few other types of budgets may include:
1. self-imposed budget
It is a process of budgeting whereby each responsibility center submits to the immediate
superior level (bottom-up approach) a budget. Following the chain of command,
organization wide, an overall company budget is developed.
Self-imposed budgets have some distinct advantages:
A. All involved feel part of the team through their participation.
B. The persons preparing the budgets are in the best position to forecast their
own operations and needs.
C. People who make their own budgets tend to live within their own budgets.
D. The authors of the budget are responsible for potential deviations from it.
However, employee freedom to make their own budget sometimes may promote
inefficiency and waste.
2. zero based budgeting
It is a budgeting process whereby all proposed costs and expenditures must be justified as
if the proposed functions or programs were initiated for the very first time. Previous
allocation of resources, past practices and customs are irrelevant. Everything is planned
and budgeted for as if it was a completely new operation. Fresh start leads to questioning
and rationalization of existing budgets instead of adding to and subtracting from recent
3. project budgeting
A Project budget is associated with the completion of a given project. Costs and time
constraints are considered. Time is relevant only as to the level of completion and
completion date. For example, 20% completion within the first quarter of the year means
that the project will be 20% complete by March 31.
4. Master budget
The master budget comprises from a series of sub budgets summarizing all planned
activities of all sub-units. It normally consists of the following sub budgets:
A. Sales budget
It is based on a sales forecast. A sales forecast can be affected by:
Past experience (sales volume)
General economic conditions
Companys market share (existing and target share)
Overall promotion strategy which may assist or hamper sales
Methods of forecasting
Methods of forecasting may include the following:
Average absolute or percentage change
Weighted average absolute or percentage change
Moving average absolute or percentage change
Note: Naive Models (A under quantitative models above) are based on the idea that history
usually repeats itself. Simple forecasting rules are devised, such as the forecast equals the
current year plus five percent.
Input - output
Time Series Models
Note: Casual models attempt to identify relationships between variables that have held in the
past. For example, Sales volume for a given brand and that product's relative price are
related the relationship of sales volume fluctuations and price is then assumed to hold into
Ratios and spread
Learned Behaviour Models
Product life cycle
Note: Extrapolative forecasts for particular variables are made on the basis of that variable's
history. The patterns identified in the past are assumed to hold into the future.
Judgement from the ex experts