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# ectives What is a budget Purpose of budgets Importance of budgets Keys to effective budgets Budget calendar The budget process steps What is a Budget?...

Please describe how budgets are set in your organization and how you are linked to the budgeting process. If you do not know, go and ask the right people about your organization's budgeting process. Do not report company confidential information here in this semi-public forum.

Questions: how does your budget process compare to the one described in Lesson 3? Does the budget affect your work? How would you improve your firm’s budget process? What inputs do you have or provide to the budget process for your group or your organization?

We expect you to contrast and compare budgeting methods noting the strengths and weaknesses based on your learning in Lesson 3.

Lesson 3 notes and example are attached

Please this question is for Rudra only

BUDGETING TECHNIQUES Lesson 3 for EGMT531
Learning Objectives What is a budget Purpose of budgets Importance of budgets Keys to effective budgets Budget calendar The budget process steps
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Total operating expenses \$87,000 \$87,500 \$89,670 \$264,170 \$88,057 17.5% Net profit \$60,000 \$65,000 \$64,300 \$199,330 \$63,100 12.5% Note that the budget categories are expressed as a percentage of sales in the last column. This is called “common sizing” the income statement and helps to provide a basis for estimating costs that scale with sales levels. In addition, the company's accountant has advised it to plan on a 3 percent overall inflation rate next year. Taking these factors into consideration, L3NewTech Company figures its expenses as shown in the preliminary budget ( Table 2 ). Table 2 - L3NewTech Company Preliminary Budget, Year 4 Amount (\$) Percent of sales Sales 533,730 100% Cost of goods sold 373,611 70% Gross profit margin 160,119 30% Operating expenses Advertising 3,605 0.7% Depreciation 4,000 0.8% Insurance 4,100 0.8% Legal and accounting expenses 4,142 0.8% Office expenses 2,995 0.6% Rent 24,000 4.5% Repair and maintenance 437 0.1% Salaries 34,650 6.5% Telephone and utilities 7,683 1.4% Miscellaneous 9,507 1.8% Total operating expenses 95,119 17.8% Net profit 65,000 12.2% Under fixed costs, the company estimates that Rent will remain unchanged at \$24,000 per year. Depreciation will remain unchanged at \$4,000 per year. Salaries will be raised by 5 percent (.05). Salary raises are calculated by multiplying prior salary expenses (\$33,000) by 1.05, equaling budgeted salaries of \$34,650. The annual insurance expense of \$1,700 will be increased by \$2,400 to provide for additional medical coverage, so will now be budgeted at \$4,100. The company calculates variable costs as follows: Telephone and utilities expenses will be budgeted for \$7,683. This figure includes average annual cost of \$6,183 plus the \$1,500 expected increase. (Average annual cost is used because the amount fluctuated over the three years.) Advertising, repair and maintenance, and miscellaneous expenses also fluctuate annually. These figures are computed by multiplying the three-year average amount (\$3,500) by the 3 percent inflation factor (3500 x .03 = 105) and adding the amount of increase to the three-year average amount (105 + 3,500 = 3,605) (or, using the shortcut explained above, multiplying 3,500 by 1.03). Due to company growth, office expenses increased 10 percent each year. To compute office expenses for the budget, the company adds the 10 percent growth factor to the 3 percent inflation rate (total increase equals 13 percent) and multiplies one plus this growth factor (I. 13) by the most recent office expenses in Year 3, \$2,650. Budgeted office expenses are then estimated at \$2,995 (2,650 x 1. 1 3 = 2,995). Legal and accounting expenses increased 6 percent each year. To compute legal and accounting expenses for the budget the company adds a 6 percent growth factor to the 3 percent inflation rate (totaling 9 percent) and multiplies one plus this rate (1.09) by legal and accounting expenses in Year 3, \$3,800. Legal and accounting expense is then budgeted for \$4,142 (3,800 x 1.09 = 4,142). Estimated office, legal and accounting expenses show an expected 3 percent inflation increase. As these expenses are steadily rising, the highest and most recent figures are used to compute budget figures. Step 3: Calculate gross profit margin. Gross profit margin is the sum of net profit and total operating expenses, computed by working the preliminary budget backwards. L3NewTech Company's gross profit margin is obtained by adding net profit of \$65,000 to operating expenses of \$95,119, equaling \$160,119. Step 4: Estimate sales revenue. An Example of Profit Planning file:///home/stephen/Desktop/L3Example.htm 2 of 8 07/23/2013 11:16 AM
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Running head: BUDGET MAKING PROCESS Budget Making Process
Name
Institution 1 BUDGET MAKING PROCESS 2
Budget Making Process A budget can get described as a systematically drawn plan that list...

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