Budgeting – Planning, Control & Decision‑Making

Introduction to Budgeting

Budgeting is the systematic process of estimating future financial outcomes and allocating resources accordingly. It is a cornerstone of managerial accounting, enabling managers to plan, coordinate, and control activities.

Purpose and Benefits

Types of Budgets

The Budgeting Cycle (Mermaid Flowchart)

flowchart TD
  A["Strategic Planning"] --> B["Forecasting"]
  B --> C["Budget Development"]
  C --> D["Approval & Communication"]
  D --> E["Execution & Monitoring"]
  E --> F["Variance Analysis"]
  F --> G["Feedback & Revision"]
  G --> A

Budget Preparation Process

1. Set Objectives – Define financial and operational goals.
2. Collect Data – Historical performance, market trends, and assumptions.
3. Forecast – Estimate sales volume, prices, costs, and cash flows.
4. Allocate Resources – Assign budgets to departments or projects.
5. Review & Approve – Management evaluates feasibility and alignment.
6. Communicate – Distribute budgets to relevant units.
7. Implement – Execute plans while tracking actual results.
8. Analyze Variances – Compare actual vs. budgeted figures.
9. Revise – Adjust forecasts and budgets for the next period.

Master Budget Components

Cash Budget – Detailed Example

Ledger Posting Example – Cash Budget

Variance Analysis

• Unfavorable Variance: Actual > Budget (cost overrun or revenue shortfall).
• Favorable Variance: Actual < Budget (cost saving or higher revenue).

Advantages & Disadvantages

Real‑World Applications

In the real world

1. eSewa – Uses a cash budget to forecast daily transaction volumes and ensure sufficient liquidity for instant payments.
2. Daraz – Implements a flexible operating budget that adjusts marketing spend based on real‑time sales data during festive seasons.
3. Ncell – Employs a master budget integrating capital expenditures for 5G infrastructure with operating budgets for network maintenance.

Worked Example – Sundar Store (Kathmandu)

• Objective: Achieve NPR 3,000,000 net profit in FY 2025.
• Sales Forecast: 15,000 units @ NPR 1,200 = NPR 18,000,000.
• Cost of Goods Sold: 60% of sales = NPR 10,800,000.
• Operating Expenses: Salaries (NPR 2,000,000), Rent (NPR 1,200,000), Utilities (NPR 300,000).
• Budgeted Net Income: 18,000,000 – 10,800,000 – 3,500,000 = NPR 3,700,000.
• Variance Analysis: If actual sales are 14,000 units, revenue falls by NPR 1,200,000, leading to a negative variance that triggers a review of marketing strategy.

In the real world

• Pathao: Uses a cash budget to manage driver payouts and ensure sufficient cash for daily operations.
• NEPSE: Traders rely on operating budgets to forecast trading volumes and set target profits for each session.

Exam tip

• Understand the budgeting cycle: Be able to draw the flowchart and explain each step.
• Know the differences between static and flexible budgets; practice converting a static budget into a flexible one.
• Practice variance calculations: Given budgeted and actual figures, compute and interpret variances.
• Master budget integration: Be able to explain how sales, production, and cash budgets fit together.
• Use tables and diagrams: In written answers, include tables for budgets and mermaid diagrams for processes.

Sample budget spreadsheet used in accounting software (Image: Smallbones, CC0, via Wikimedia Commons) Cash flow statement example (Image: Ladyfwr, CC BY-SA 3.0, via Wikimedia Commons)