Week 9 ADM Topic 11 S12015 3up

8/9/2019 Week 9 ADM Topic 11 S12015 3up

1/14

22/04/2015

Life Impact The University of Adelaide

Management AccountingBudgeting

Accounting for Decision Makers Topic 11

Introduction to Management Accounting

Slide 1 Life Impact The University of Adelaide

Learning Objectives

• understand the link between strategic planning andbudgeting

• list the key steps in the budgeting process

• identify the different types of budgets

• outline the components of a master budget and prepare amaster budget

• prepare a schedule of receipts from debtors and a cashbudget

• outline the issues associated with the behavioural aspects ofbudgeting



Management Activities

Planning

• Set business goals• Identify Resources Needed• Budgeting / Capital Investment

Operating

• Day to day decisions• CVP / Pricing Decisions

Evaluating

• Measure performance• Continuous Improvement


2/14

22/04/2015



BUDGETING AND STRATEGIC PLANNING

• Strategic planning concerns longer term planning(typically, 3-5 years)

• It is usually carried out by senior management

• It commonly relates to broader issues such asbusiness takeovers, expansion plans, deletion ofbusiness segments, and radical product/servicedevelopment



BUDGETING AND STRATEGIC PLANNING

• Budgeting is a process that focuses on short term

• Budgets operationalise strategic plans and allow operationalareas to understand how their area contributes to theentity’s strategic objectives



BUDGETS

• Entities engage in a planning process that requiresinvolvement in a budgeting process

• Part of the formal planning process relates to an entity’soperational plans, including short term goals and targets

• Performance management involves setting targets inother than just financial terms

e.g., improving customer service, corporategovernance, management techniques, andhuman resource management


3/14

22/04/2015



BUDGETS

• A budget is the quantitative expression of an entity’splans

• Budgeting can assist in decision making by:

– putting into operation longer term plans– setting targets for managers– identifying resource constraints in budget period– identifying periods of expected cash shortages and

excess cash holdings– assisting with short-term planning decisions, such as

capacity utilisation



BUDGETS

– providing profit forecasts and other financial data to thecapital markets

– forecasting data such as sales or fees, which commonlyset the level of activity for the budget period

– helping determine required inventory levels andpurchasing requirements for raw materials

– planning labour and other inputs

– determining the ability of the entity to meet financingcommitments

Air Asia



The budgeting process

1. Consideration of past performance

2. Assessment of expected trading and operating conditions

3. Preparation of initial budget estimates

4. Adjustment to based on communication with managers

5. Preparation of budgeted reports and sub-budgets

6. Monitoring of actual performance against the budget

7. Making any necessary adjustments to the budget

http://www.youtube.com/watch?v=8PDWXt6CHyA&feature=fvsrhttp://www.youtube.com/watch?v=8PDWXt6CHyA&feature=fvsr


4/14

22/04/2015







TYPES OF BUDGETS

• Sales (or fees) budget

• Operating (expenses) budget

• Production and inventorybudgets

• Purchases budget

• Budgeted income statement

• Cash budget

• Budgeted balance sheet

• Capital budgets

• Manufacturing overheadbudget

• Program budget


5/14

22/04/2015



Master budget

Master budget – set of interrelated budgets:

• operating budgets (sales and production) lead tobudgeted statement of financial performance

• financial budgets (cash budget and budgetedstatement of financial position) concern cashresources for expected operations and capitalexpenditure

• Budget can be used as a control tool to monitor theentity’s achievement of its plans, classification ofitems included in the master budget needs to mirrorthe entity’s chart of accounts

• Budgets are forecasts about the future, completeaccuracy is impossible and variances will inevitablyarise



Master budget



Interconnection Sales & Production

Sales

Production

Materials& Labour


6/14

22/04/2015



Sales budget• Develop the sales budget



Production budget

• Develop the production budget



Materials budget• Develop the materials budget


7/14

22/04/2015



Labour budget• Develop the labour budget



Operating Expenses budget

• Develop the operating expenses budget



PREPARING OPERATING BUDGETS

Budgeted income statement – end-point of operatingbudgets

– shows expected profitability for budget period (mayneed to explore alternative strategies using Cost-Volume-Profit analysis if budgeted outcome is notwhat we want)

– combines individual operating budgets plus additionalexpenses (e.g. interest, taxes)

– forms basis for performance evaluation


8/14

22/04/2015



PREPARING CASH BUDGETS• The cash budget is a statement of expected future

cash receipts and payments

• It assists decision making by:

– documenting timing of all cash receipts andpayments

– helping to identify periods of expected cashshortages and surpluses

– identifying suitable times for purchase of non-current assets

– assisting with planning and use of borrowed funds– providing a framework for ‘what if’ analysis



PREPARING CASH BUDGETS





9/14

22/04/2015




Cash budget – three sections:

– cash receipts: expected cash inflows from customers,interest, dividends, planned sales of assets andshares

– cash payments: expected cash outflows for directmaterials and labour, overheads, selling &administration costs, taxes, dividends, assets

– financing: expected cash borrowings and repaymentsof borrowings




Cash budget combines ending cash balance fromprevious period plus details from other budgets

– annual cash budget often detailed on monthly basisto reflect anticipated levels of activities

– helps plan for cash excesses and shortfalls




• For an entity that provides goods or services on credit, oneof the main tasks in the preparation of a cash budget iscalculating the cash receipts from the credit sales or feesgenerated

• This is commonly shown in a schedule of receipts fromdebtors/accounts receivable


10/14

22/04/2015



schedule of receipts from debtors



3 month cash budget



PREPARING FINANCIAL BUDGETS

Budgeted balance sheet – projected financial position atend of budget period

– combines previous period’s budgeted financial positionand budgets for current period (sales, direct materials,direct labour, overheads, selling and administrationbudgets)

– similar format to that prepared for external users


11/14

22/04/2015



BUDGETS: PLANNING AND CONTROL

• The preparation of the cash budget is an important part of

the planning process

• It can then be used for monitoring cash performance, alsoknown as the control process

• A cash budget prepared on a month-by-month basis ismuch more useful for this purpose than one prepared on aquarterly or yearly basis



BUDGETS: PLANNING AND CONTROL



Cash budget Variance report


12/14

22/04/2015



IMPROVING CASH FLOW

• Cash inflow may be increased by:

– improving the collections of cash from debtors– seeking ways to improve sales or fees– reducing unnecessary stock levels– arranging external finance– providing an extra capital contribution from the

owners, or considering a change in ownership structure– selling excess non-current assets



IMPROVING CASH FLOW

• Cash outflow may be reduced by:

– cutting expenses by identifying areas of waste,duplication or inefficiency

– making use of creditors’ terms – keeping inventory levels to only what is required, as

excess inventory ties up cash and often adds tostorage and handling costs

– deferring capital expenditures



RESPONSIBILITY ACCOUNTING

Accumulating and reporting costs and revenuesaccording to managers with authority to makedecisions concerning the items

– personalises management accounting systems– performance reports relate only to controllable items– effectiveness can be measured and reported at all

management levels


13/14

22/04/2015



ROI

RESPONSIBILITY ACCOUNTINGEXAMPLE: PERFORMANCE MEASUREMENT



BEHAVIOURAL ASPECTS OF BUDGETING

• Like all decision-making processes, budgeting is affectedby human behaviour, attitudes and assumptions

• These are seen in the management styles adopted in thebudget process



BEHAVIOURAL ASPECTS OF BUDGETING

• In an authoritarian management style of budgeting :– senior management simply sets the targets and the

budget for unit managers– unit managers have little say in the targets that are set

• In a participative style of budgeting:– targets and budgets are arrived at by a process of

discussion and negotiation between senior managementand unit managers

– unit managers are seen to have had a say in the settingof targets and the budget


14/14

22/04/2015



Game Playing - BEHAVIOURAL ASPECTS OF BUDGETING

• The behavioural aspects of budgeting are also seen in the

attempts by some line managers to:

– overstate planned expenditure or understate plannedrevenue or receipts

– include some margin for error in case targets are notmet

– manipulate information so that their performance ispresented in the best possible light



Summary

• Strategic planning influences shorter term aspects ofthe budgetary planning process

• A master budget may be viewed as a set of interrelatedbudgets for a future period

• A master budget is commonly classified into a set ofoperating budgets and financial budgets

• The behavioural aspects of budgeting relate to thehuman involvement in decision making

Week 9 ADM Topic 11 S12015 3up

Documents

Transcript of Week 9 ADM Topic 11 S12015 3up