Accounting in Organisations and Society

Accounting in
Organisations and Society
Module 2 –Accounting and its role in managerial
decision making
Topic 3: Performance measurement budgeting
Accounting in Organisations and Society

Learning objectives
After completing this unit, you should be able to:
1. Understand the context of budgeting.
2. Explain what is a budget.
3. Explain why to budget, and to whom is it provided.
4. Explain what and how budget information should be provided.
5. Understand how to prepare different budgets.
6. Describe an organisation’s budget administration process.
7. Discuss behavioural consequences of budgeting.
Accounting in Organisations and Society

What is a budget?
• A detailed plan (in financial and non-financial terms) of
management activities for a certain time period – normally a
12-month period.
• Linked to the organisation’s long-term strategic plans and
goals. The strategic plan usually identifies:
• How product value is to be created;
• The external factors- social, environmental, technological.
• The budget essentially reflects the short-term goals of the
primary decision-makers.
Accounting in Organisations and Society

Why budgeting is important and to

whom is it provided?
• The budget is one of the most important means of
communication and coordination.
• The budget is an essential tool for planning,
organising and controlling activities.
• Budgets are usually provided to those people within
the organisation who have responsibility (and are
held to account) for the resources (labour, materials,
cash).
Accounting in Organisations and Society

Budgets and Planning

Setting Goals
• The budget is also a way of indicating to people
those factors that are considered important.
• Changing organisational goals will usually be reflected
in budget changes.
• Budget goals may also act as a form of motivation for
those who are held responsible for its delivery and
achievement.
Accounting in Organisations and Society

Budgets and Organising

Allocating Resources and Responsibility
• When setting budgets, resources need to be allocated
to the different activity areas.
• The manager is responsible for the efficient and
effective use of resources.
• Rewards for managers may be attached to meeting
their budget goals.
Accounting in Organisations and Society

Budgets and Controlling

Measuring Performance
• Comparing actual results with budgets (the differences
are called variances).
• Provides a basis for evaluation of the performance of
organisation.
• This can be linked to formal incentives, such as cash
rewards, promotions, awards or profit sharing.
Accounting in Organisations and Society

Budgeting
The Master (Annual) Budget
• The master budget is a comprehensive set of budgets
that cover all aspects of a firm’s activities.
• The master budget consists of several interdependent
budgets:
• Operating budgets include the sales budget and the various
cost budgets.
• Financial budgets consist of the budget statement of
financial performance, the budgeted statement of financial
position, the cash budgets (will learn in Module 3).
Accounting in Organisations and Society

Operating Budgets
Sales Budget
• A detailed summary of the estimated sales units and
revenues from the organisation’s products for the
budget year.
• Factors to consider when forecasting sales include:
• Internal factors: e.g. past sales levels; new products planned;
• External factors: e.g. general economic trends, specific
industry trends.
Accounting in Organisations and Society

Operating Budgets
Cost budgets
• Manufacturing firms:
• A production budget, which has cost budgets for direct
materials, direct labour and overheads.
• Budgets for marketing, general and administrative expenses.
• Retailers and wholesalers:
• A purchasing budget, will be used to determine the quantity and
cost of goods purchased for resale.
• Budgets for marketing, general and administrative expenses.
Accounting in Organisations and Society

Illustration
Sales Budget
William is an accountant for EFG Doors Manufacturing Company.
The expected sales for 2017 will be:
Q1 2,000 units Q2 2,200 units
Q3 2,400 units Q4 2,600 units.
The selling price for each unit is $500.
Prepare the sales budget based on sales forecast.
EFG Doors Manufacturing Company Sales Budget for the year ending 31 December 2017

Q1 Q2 Q3 Q4 Total
2,000 2,200 2,400 2,600 9,200
Expected Sales units
$500 $500 $500 $500 $500
Selling Price

Total Sales Revenue

Accounting in Organisations and Society

Illustration
Production Budget
William would like to develop a production budget.
According to accounting records, the beginning inventory is 200
doors and the inventory manager wants to increase inventory to 300
at the end of each quarter.
Prepare a production budget.
EFG Doors Manufacturing Company Production Budget for the year ending 31 December 2017
Q1 Q2 Q3 Q4 Total
Expected Sales (Units) 2,000 2,200 2,400 2,600
Add: Desired ending inventory 300 300 300 300
Less: Beginning inventory
Required production units
Accounting in Organisations and Society

Illustration
Material Budget
Once production output has been estimated, William needs to determine the cost of
material purchases.
The beginning material inventory is $30,000 and manager wants ending materials
inventory per quarter to be $40,000 due to the sale increase. The material cost is
expected to be same as last year which is $100 for each door.
Prepare a material budget.
EFG Doors Manufacturing Company Material Budget for the year ending 31 December 2017
Q1 Q2 Q3 Q4 Total
Units to be produced 2,100 2,200 2,400 2,600 9,300
Material cost per door $100 $100 $100 $100
Cost of material required for production
Target ending materials inventory 40,000 40,000 40,000 40,000
Total material required
Less: Beginning materials inventory
Total cost of material purchases
Accounting in Organisations and Society

Illustration
Labour Budget
Based on production requirements, labour hours for each
door are 2 hours, and wages are at $20 per hour.
Prepare a labour budget.
EFG Doors Manufacturing Company Labour Budget for the year ending 31 December 2017

Q1 Q2 Q3 Q4 Total

Units to be produced 2,100 2,200 2,400 2,600 9,300

Labour time per door 2 2 2 2 2

Total required labour hours

Labour cost per hour $20 $20 $20 $20 $20

Total labour cost

Accounting in Organisations and Society

Illustration
Overhead Budget
Based on last year’s information and reasonable forecasts,
William developed the following production overhead budget
and Selling and administrative expenses budget.
The following table is an example of overhead budget.
EFG Doors Manufacturing Company Production Overhead Budget
for the year ending 31 December 2017

Q1 Q2 Q3 Q4 Total

Depreciation $80,000 $80,000 $80,000 $80,000 $32,0000

Supplies 10,000 10,000 10,000 10,000 40,000

Indirect manufacturing labour 20,000 20,000 20,000 20,000 80,000

Supervision 10,000 10,000 10,000 10,000 40,000

Total production overhead $120,000 $120,000 $120,000 $120,000 $480,000

Accounting in Organisations and Society

Illustration
Selling and Administrative Expenses Budget
The following table is an example of selling and
administrative expenses budget.
EFG Doors Manufacturing Company Selling and Administrative Expenses Budget
for the year ending 31 December 2017

Q1 Q2 Q3 Q4 Total

Administration $50,000 $50,000 $50,000 $50,000 $200,000

Marketing $20,000 $20,000 $20,000 $20,000 80,000

Distribution $10,000 $10,000 $10,000 $10,000 40,000

Total selling and admin

$80,000 $80,000 $80,000 $80,000 $320,000
cost
Accounting in Organisations and Society

The financial budgets

• The cash budget
Expected cash receipts and planned cash payments.
• Budgeted income statement
Shows expected revenues and planned expenses for the
budget period.
• Budgeted balance sheet
Shows assets and liabilities at the end of the budget period.
Accounting in Organisations and Society

Illustration
Cash Budget
You are an accountant working in Aza Pty Ltd. It is the beginning of
the year, and you are going to prepare a cash budget. The following
depicts the relevant information:
• The cash balance at the beginning of January 2017: $22,000
• Customers pay their bills one month after their purchase. The
sales for the last December is $98,000; and the expected sales
will be: January $139,000; February $14,0000
• A machine worth $34000 will be sold in January for cash.
• Your company pays suppliers 50% of purchases in the same
month and the remaining 50% in the following month. The
purchase information for the last December is $68,000, and the
expected purchases will be January $76,000; February $30,000.
Accounting in Organisations and Society

Illustration
Cash Budget (con’t)
• Labour costs for the previous December were $55,000, the
expected salary in January is $50,000, and February $58,000
(Wages are paid in the following month).
• Manufacturing overhead: January $30,000; February $28,000
(overhead will be paid when it occurs).
• Selling and administrative expenses: January $18,000; February
$17,000 (costs will be paid when they occur).
• A loan worth $10,000 will be due in January.
• Aza Pty Ltd expects to maintain a minimum $12,000 in cash on
hand at the end of each month. If the cash is not enough, they will
borrow from a local bank.
Accounting in Organisations and Society

Illustration
Cash Budget (con’t)
Required:
• Prepare a cash budget for the month- January and
February.
Accounting in Organisations and Society

Illustration
Cash budget
• See document camera
Accounting in Organisations and Society

Budgeting
Behavioural Aspects
Budgets affect virtually all people in an organisation:
• Those who prepare the budget;
• Those who use the budget for decision making; and
• Those whose performance is evaluated using the
budget.
Accounting in Organisations and Society

Budgeting
Behavioural Aspects
There are three general approaches to budgeting:
1. Participative budgeting: managers at all levels develop
their budgetss.
2. Top-down budgeting: senior managers impose budget
targets.
3. Bottom-up budgeting: lower managerial and operations
levels play an active part in budget setting.

What kind of budget is more easy to be accepted?

Accounting in Organisations and Society

Multiple Choice questions

1. Which of the following statements is correct regarding
budgets?
a. A budget is a detailed quantitative plan which can be expressed
in financial and nonfinancial terms
b. A budget relates to a certain time period (normally a 12-month
period)
c. A budget is linked to the organisations long-term strategic plans
and goals
d. All of the above
Accounting in Organisations and Society

Multiple Choice questions

2. The annual budget (or master budget) is a comprehensive
set of budgets that cover all aspects of a firm’s activities. The
annual budget consists of several interdependent budgets.
These interdependent budgets include:
a. The sales budget and various cost budgets
b. The budgeted statement of financial planning, the budgeted
statement of financial scenario and the non-cash budget.
c. The surplus budget and the deficit budget
d. All of the above
Accounting in Organisations and Society

Multiple Choice questions

3. Which of the following budgeting techniques generally
encourages coordination and communication between
managers and a greater understanding and appreciation
of the wider organisation?
a. Participative budgeting
b. Top-down budgeting
c. Bottom-up budgeting
d. Constructive budgeting
Accounting in Organisations and Society

Conclusion and overview

• When preparing budgets, we should take into account
changing external environmental requirements.
• Budgets could influence people’s behaviour.