MGMT 408 Week 5 Budget Preparation Tutorial

990600125095 91440099084 1066776100354 1123950106704 914400231812 1066775100354 914400116229 914400238137 106680023327211523461109572 MGMT408 Budget Tutorial Transcript Slide 1 No audio Slide 2 Our example will be a very simple one in order to introduce you to the concepts behind budget preparation and estimation. The example uses simple calculations to estimate different account costs for the coming year. Be aware that not all budget items require calculations to obtain an estimate. For example, the company needed a larger phone system in 2010. Instead of buying a system we chose to lease a system. That made our lease payments in 2010 almost double what they were in 2009. If we use calculations we will estimate that our lease payments in 2011 will be double what they were in 2010 –obviously not correct. Part of the budgeting process is to apply common sense to all estimates. Use calculations where appropriate and other methods (historical records, experience, “rules of thumb”, etc.) when necessary. There are two budgeting processes used to estimate the next cycle’s budget. Run-rate uses budgets from previous cycles as a starting point for estimating a new budget. Zero-based budgeting assumes every item starts at 0 and each and every item’s budget estimate must be justified. Many times which process is used depends on the economic environment. Run-rate budgeting is useful when the economy is stable or growing. Zero-based is used often when the economy is poor or a company faces severe economic hardship. Whichever method is used, we need some tools that allow us to effectively estimate budget costs for the coming budget cycle. Slide 3 Our example will use the run-rate budgeting process to estimate budgetary costs for these four main categories -Salaries and Benefits, Telecommunications and Network, Utilities, and Capital Projects. Actual budgets are comprised of many different and specific accounts that make up the major categories. The gives you an example of a detailed budget with its multiple categories. For our example we will assume we have the 2009 and 2010 actual budget amounts for our categories. We are going to estimate the 2011 budget numbers based on different criteria. All estimates are based on 2009 and 2010 actual budget values. We will hire three new technicians for the IT department at a total salary increase of $120,000. We currently employ 32 people in the IT department, adding three technicians will bring us to 35. There will be no salary increases for the IT department in 2011. Telecommunications/Network costs and Utilities will increase in cost at the same r