FINM6222 LU1
FINM6222 LU1 – Budgeting and
standard costing
1.2 Budgeting
Main elements of management are planning, organizing, activating and control.
Budgets form an important part of planning and control – can be used for future planning
and exercising control over the business’s outflows and inflows.
1.2.1 Why do people prepare budgets?
To ensure they always have enough cash and to stop them from overspending.
Example 1.1
X needs to save up R80 000 by 1 Dec 2005 so he can buy a new car. He currently has R0 in
his savings (1 Aug 2005) since he has not kept a budget.
He is a waiter at a restaurant, and he works 4 shifts of 6 hours each in the week, and 2 shifts
of 8 hours each on weekends. His standard hourly wage is R10, but his main income is
derived from the tips he earns. George estimates that he serves 6 tables on average every 2
hours, and that the average table’s bill amounts to R600 on weekdays and R1 000 over
weekends. Most tables tip their waiters around 10% of the total bill. Some give higher tips,
and others don’t tip at all. On average, though, George is guaranteed a 10% tip.
George stays in a one-bedroom flat near Cape Town. His expenses are as follows: George
also needs to purchase a new fridge for R 4 000 in November 2005.
Rent – R4800 per month
Electricity – R800 per month
Garden services – R100 per week
Groceries – R600 per week
Car payment – R3600 per month
Fuel – R700 per month
Vehicle service - 2 services per year at R1 200 per service (spread this over year)
Clothing accounts - R600 per month
Bank charges - R200 per month
Insurance - R500 per month
Entertainment - R300 per week
Sundry expenses - R600 per month
The cash budget for George for the period of 1 Aug to 30 Nove 2005 should be as follows:
1
,FINM6222 LU1
1.2.2 Why do businesses prepare budgets?
To ensure unexpected surprised do not have a detrimental effect on the business.
To help in the planning of annual operations
To coordinate the activities of the various departments
To communicate plans to the various departmental managers
To motivate managers and workers to achieve or surpass the goals of the org
To control activities
To evaluate the performance of managers and workers
1.2.3 The Budgeting Process
Step 1: Formation of a budget committee
This committee will oversee all matters related to the budget. It usually includes the CEO,
CFO, and senior managers from key departments. Their responsibilities include coordinating
the budget preparation, resolving conflicts, approving the final budget, and making major
revisions during the year.
Since budgets determine how resources are distributed across departments, disagreements
can occur especially because some departments receive more funding than others. This can
lead to tension, especially as managers are often evaluated based on how well they meet
their budget targets.
Step 2: Choosing a Budget Period
Budgets are usually prepared for a specific period typically one year, aligning with the
organisation’s financial year for easier comparison of actual and planned results.
2
, FINM6222 LU1
For better control, this annual budget is broken into smaller intervals such as monthly or
quarterly periods. Many organisations also use a continuous budgeting system, where the
budget is updated regularly (monthly) to reflect new information. This approach has become
more common thanks to the rise of user-friendly budgeting software.
Step 3: Development of Budget Guidelines
The budget committee then establishes the budget guidelines based on the organisation’s
strategic goals and long-term plans. These guidelines provide a framework that all
departments must follow when preparing their individual budgets.
In setting these guidelines, the committee considers:
Recent changes in the business environment,
Economic conditions,
Organisational changes (like restructuring), and
The most recent performance results.
Step 4: Preparation of Initial Budget Proposals
Next, each responsibility centre (department or unit) creates its initial budget proposal using
the provided guidelines. This involves considering a range of internal and external factors.
Internal factors may include:
New equipment or facility availability,
Product or process changes,
Changes in interdepartmental expectations or dependencies.
External factors may include:
Labour market shifts,
Changes in raw material prices or availability,
Industry forecasts and competitor activity.
Step 5: Budget Negotiations
Once initial proposals are drafted, negotiations begin. Department heads review whether the
budget meets the provided guidelines and whether the goals are achievable.
They must also ensure that their operations align with those of other units—especially those
they rely on or that rely on them. This step often takes time, as coordination across
departments is essential for consistency and feasibility.
Step 6: Review and Approval
After each unit finalises its budget, the proposals are consolidated into the organisation-wide
budget. The budget committee reviews the full budget to ensure it matches the guidelines
and supports the overall strategic objectives.
Once the committee approves it, the CEO signs off and submits the final budget to the board
of directors for formal approval.
3
FINM6222 LU1 – Budgeting and
standard costing
1.2 Budgeting
Main elements of management are planning, organizing, activating and control.
Budgets form an important part of planning and control – can be used for future planning
and exercising control over the business’s outflows and inflows.
1.2.1 Why do people prepare budgets?
To ensure they always have enough cash and to stop them from overspending.
Example 1.1
X needs to save up R80 000 by 1 Dec 2005 so he can buy a new car. He currently has R0 in
his savings (1 Aug 2005) since he has not kept a budget.
He is a waiter at a restaurant, and he works 4 shifts of 6 hours each in the week, and 2 shifts
of 8 hours each on weekends. His standard hourly wage is R10, but his main income is
derived from the tips he earns. George estimates that he serves 6 tables on average every 2
hours, and that the average table’s bill amounts to R600 on weekdays and R1 000 over
weekends. Most tables tip their waiters around 10% of the total bill. Some give higher tips,
and others don’t tip at all. On average, though, George is guaranteed a 10% tip.
George stays in a one-bedroom flat near Cape Town. His expenses are as follows: George
also needs to purchase a new fridge for R 4 000 in November 2005.
Rent – R4800 per month
Electricity – R800 per month
Garden services – R100 per week
Groceries – R600 per week
Car payment – R3600 per month
Fuel – R700 per month
Vehicle service - 2 services per year at R1 200 per service (spread this over year)
Clothing accounts - R600 per month
Bank charges - R200 per month
Insurance - R500 per month
Entertainment - R300 per week
Sundry expenses - R600 per month
The cash budget for George for the period of 1 Aug to 30 Nove 2005 should be as follows:
1
,FINM6222 LU1
1.2.2 Why do businesses prepare budgets?
To ensure unexpected surprised do not have a detrimental effect on the business.
To help in the planning of annual operations
To coordinate the activities of the various departments
To communicate plans to the various departmental managers
To motivate managers and workers to achieve or surpass the goals of the org
To control activities
To evaluate the performance of managers and workers
1.2.3 The Budgeting Process
Step 1: Formation of a budget committee
This committee will oversee all matters related to the budget. It usually includes the CEO,
CFO, and senior managers from key departments. Their responsibilities include coordinating
the budget preparation, resolving conflicts, approving the final budget, and making major
revisions during the year.
Since budgets determine how resources are distributed across departments, disagreements
can occur especially because some departments receive more funding than others. This can
lead to tension, especially as managers are often evaluated based on how well they meet
their budget targets.
Step 2: Choosing a Budget Period
Budgets are usually prepared for a specific period typically one year, aligning with the
organisation’s financial year for easier comparison of actual and planned results.
2
, FINM6222 LU1
For better control, this annual budget is broken into smaller intervals such as monthly or
quarterly periods. Many organisations also use a continuous budgeting system, where the
budget is updated regularly (monthly) to reflect new information. This approach has become
more common thanks to the rise of user-friendly budgeting software.
Step 3: Development of Budget Guidelines
The budget committee then establishes the budget guidelines based on the organisation’s
strategic goals and long-term plans. These guidelines provide a framework that all
departments must follow when preparing their individual budgets.
In setting these guidelines, the committee considers:
Recent changes in the business environment,
Economic conditions,
Organisational changes (like restructuring), and
The most recent performance results.
Step 4: Preparation of Initial Budget Proposals
Next, each responsibility centre (department or unit) creates its initial budget proposal using
the provided guidelines. This involves considering a range of internal and external factors.
Internal factors may include:
New equipment or facility availability,
Product or process changes,
Changes in interdepartmental expectations or dependencies.
External factors may include:
Labour market shifts,
Changes in raw material prices or availability,
Industry forecasts and competitor activity.
Step 5: Budget Negotiations
Once initial proposals are drafted, negotiations begin. Department heads review whether the
budget meets the provided guidelines and whether the goals are achievable.
They must also ensure that their operations align with those of other units—especially those
they rely on or that rely on them. This step often takes time, as coordination across
departments is essential for consistency and feasibility.
Step 6: Review and Approval
After each unit finalises its budget, the proposals are consolidated into the organisation-wide
budget. The budget committee reviews the full budget to ensure it matches the guidelines
and supports the overall strategic objectives.
Once the committee approves it, the CEO signs off and submits the final budget to the board
of directors for formal approval.
3
