Budget Setting

A budget is simply a formal quantified forecast, usually translated into financial terms. The process of budget setting (the planning phase of budgeting) usually begins with the factor which is most likely to constrain the overall activity level of the organisation. This is usually sales (although production capacity, shortage of materials, labour or cash could all constrain the level of activity in abnormal circumstances). Assuming the level of sales that can be earned will determine the level of production that will be planned for, the sales budget is usually prepared first. This will establish the amount, timing and value of sales expected for each product. The sales levels will determine the production schedules for each product (allowing for any planned changes in stocks of finished goods). From the production schedule the productive inputs (materials, labour, variable manufacturing overheads) in terms of quantity and cost can be estimated.

The Roles of Standard Costing

In a typical manufacturing company where a wide variety of components and products are produced and numerous types of raw materials and grades of labour are used in production the estimation of production costs, given a budgeted production schedule, is an enormously complex task. The forecasting of production input costs for both decision-making purposes and budgeting is greatly simplified by standard costing which can be applied to any production process which involves standard operations. (Standard costing is used in around 75% of UK manufacturing companies). Where components or products are produced in standardised production runs or batches it is possible to establish through a combination of