pp09

Slide 9.
Chapter 9
BUDGETING
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 9th edition Pearson Education Limited 2015
Slide 9.2
LEARNING OUTCOMES
You should be able to:
Define a budget and show how budgets, strategic
objectives and strategic plans are related
Explain the budgeting process and the interlinking

of the various budgets within the business
Indicate the uses of budgeting and construct
various budgets, including the cash budget,
from relevant data
Show how flexing the budget can be used to
exercise control over the business
Slide 9.3
Budgets and budgeting:

In its 2009 annual report, BSkyB Group plc, the satellite television broadcaster said
(about itself): There is a comprehensive budgeting and forecasting process, and the
annual budget, which is regularly reviewed and updated, is approved by the Board
[of directors].
Performance is monitored against budget through weekly and monthly reporting
cycles
Slide 9.4
How budgets link with strategic plans and objectives:

It is vital that businesses develop plans for the future. What a business is trying to
achieve is unlikely to come about unless its managers are clear what the future
direction of the business is going to be. The development of plans involves five key
steps:
1.Establish mission and objectives:
The mission statement sets out the ultimate purpose of the business. It
is a broad statement of intent.
The strategic objectives are more specific and will usually include
quantifiable
1. Undertake a position analysis: This involves an assessment of where the business

is currently placed in relation to where it wants to be, as set out in its mission and
strategic objectives.
2.Identify and assess strategic options: The business must explore the various ways
in which it might move from where it is now (identified in step 2) to where it wants
to be (identified in step 1).
Slide 9.5
4.
Select strategic options and formulate plans: This involves selecting what
seems to be the best of the courses of action or strategies (identified in step 3)
and formulating a long-term strategic plan.
This strategic plan is then normally broken down into a series of short-term
plans, one for each element of the business. These plans are the budgets.
A budget is a business plan for the short term typically one year and is
expressed mainly in financial terms. Its role is to convert the strategic plans
into actionable blueprints for the immediate future.
Budgets will define precise targets concerning such things as:
cash receipts and payments,
sales volumes and revenues, broken down into amounts and prices for each
of the products or services provided by the business,
detailed inventories requirements,
detailed labour requirements, and
specific production requirements.
5. Perform, review and control: Here the business pursues the budgets derived
in step 4. By comparing the actual outcome with the budgets, managers
can see if things are going according to plan or not. Action would be taken
to exercise control where actual performance appears not to be matching
the budgets.
Slide 9.6
How budgets link with strategic plans and objectives:

From the above description of the planning process, we can see that the relationship
between the mission, strategic objectives, strategic plans and budgets can be
summarised as follows:
the mission sets the overall direction and, once set, is likely to last for quite a long
time perhaps throughout the life of the business;
the strategic objectives, which are also long-term, will set out how the mission
can be achieved;
the strategic plans identify how each objective will be pursued; and
the budgets set out, in detail, the short-term plans and targets necessary to fulfil
the strategic objectives.
Slide 9.7
The planning and control process

Establish mission and objectives
Undertake a position analysis
Identify and assess strategic options

Select strategic options and formulate
long-term (strategic) plans
Prepare budgets
Perform and collect information on
actual performance
Identify variances between planned
(budgeted) and actual performance
Respond to variances and exercise control
Revise plans (and budgets) if necessary

Figure 9.1
The planning and control process

Slide 9.8
Budgets and forecasts

A budget may, as we have already seen, be defined as a business plan for the
short term. Budgets are, to a great extent, expressed in financial terms.
Note particularly that a budget is a plan, not a forecast. To talk of a plan
suggests an intention or determination to achieve the targets;
Forecasts tend to be predictions of the future state of the environment.
Clearly, forecasts are very helpful to the planner/budget-setter.
If, for example, a reputable forecaster has predicted the number of new
cars to be purchased in the UK during next year, it will be valuable for
a manager in a car manufacturing business to take account of this
information when setting next years sales budgets.
However, a forecast and a budget are distinctly different.
Slide 9.9
Periodic and continual budgets

Budgeting can be undertaken on a periodic or a continual basis.
A periodic budget is prepared for a particular period (usually one year). Managers
will agree the budget for the year and then allow the budget to run its course.
Although it may be necessary to revise the budget on occasions, preparing
the budget is in essence a one-off exercise during each financial year.
A continual budget: as the name suggests, is continually updated. We have seen
that an annual budget will normally be broken down into smaller time intervals
(usually monthly periods) to help control the activities of a business.
A continual budget will add a new month to replace the month that has just
passed, thereby ensuring that, at all times, there will be a budget for a full
planning period. Continual budgets are also referred to as Rolling
budgets.
Slide 9.10
How budgets link to one another

A business will prepare more than one budget for a particular period.
Each budget prepared will relate to a specific aspect of the business. The ideal
situation is probably that there should be a separate operating budget for each
person who is in a managerial position, no matter how junior.
The contents of all of the individual operating budgets will be summarised in
master budgets, usually consisting of a budgeted income statement and statement
of financial position (balance sheet).
The cash budget is considered by some to be a third master budget.
Slide 9.11
The interrelationship of operating budgets

Trade
receivables
budget
Sales
budget
Overheads
budget
Finished
inventories
budget
Figure 9.2
Trade
payables
budget
Cash
budget
Capital
expenditure
budget
Production
budget
Direct
labour
budget
Raw
materials
purchases
budget
Raw materials
inventories
budget
The interrelationship of operating budgets

Slide 9.12
The vertical relationship between sales budgets
Overall sales budget
Sales budget
North region
Figure 9.3
Sales budget
South region
Sales budget
East region
Sales budget
West region
The vertical relationship between a businesss sales budgets

Slide 9.13
How budgets help managers

Budgets are generally regarded as having five areas of usefulness:
1.Budgets tend to promote forward thinking and the possible identification of shortterm problems.
2.Budgets can be used to help co-ordination between the various sections of the
business
3.Budgets can motivate managers to better performance. Having a stated task can
motivate managers and staff in their performance. Simply to tell a manager to do his
or her best is not very motivating, but to define a required level of achievement is
more likely to be so.
1.Budgets can provide a basis for a system of control: This will enable the use of
Management by exception, a technique where senior managers can spend most of
their time dealing with those staff or activities that have failed to achieve the
budget(the exceptions).
1.Budgets can provide a system of authorisation for managers to spend up to a
particular limit.
Slide 9.14
The five main benefits of budgets to a business
Promote forward
thinking and
identification of
short-term
problems
Budgets
Help co-ordinate
the various
sections of the
business
Motivate
managers
to better
performance
Provide a basis
for a system of
control
Provide a
system of
authorisation
Figure 9.4
Budgets are seen as having five main benefits to the business

Slide 9.15
Accuracy of revenue budgets

>50% over plan
2%
2650% over plan
2%
12%
1125% over plan
27%
110% over plan
11%
Came in on plan
28%
110% under plan
10%
1125% under plan
3%
>25% under plan
5%
Dont know
0
Figure 9.5
10
15
(%)
20
25
30
The accuracy of revenue budgets
Source: Information from Perfect how you project, BPM Forum, 2008.
Slide 9.16
Incremental budgeting
There is a tendency with some types of budget for the budget-setting to be done
on the basis of what happened last year, with some adjustment for any changes in
factors that are expected to affect the forthcoming budget period (for example,
inflation).
This approach is known as incremental budgeting and is often used for
discretionary budgets, such as research and development and staff training. With
this type of budget, the budget holder (the manager responsible for the budget) is
allocated a sum of money to be spent in the area of activity concerned.
They are referred to as discretionary budgets because the sum allocated is
normally at the discretion of senior management. These budgets are very common
in local and central government (and in other public bodies), but are also used in
commercial businesses to cover the types of activity that we have just referred to.
Slide 9.17
zero-base budgeting
Zero-base budgeting rests on the philosophy that all spending needs to be
justified. Thus, when establishing, say, the training budget each year, it is not
automatically accepted that training courses should be financed in the future
simply because they were undertaken this year. The training budget will start from
a zero base (that is, no resources at all) and will only be increased above zero if a
good case can be made for the scarce resources of the business to be allocated to
this form of activity.
Top management will need to be convinced that the proposed activities represent
value for money.
Zero-base budgeting encourages managers to adopt a more questioning
approach to their areas of responsibility. To justify the allocation of resources,
managers are often forced to think carefully about the particular activities and the
ways in which they are undertaken.
This questioning approach should result in a more efficient use of business
resources.
Slide 9.18
Slide 9.19
An example of a budget the cash budget

Jan
Feb
Mar
Apr
May
June
000
000
000
000
000
000
60
52
55
55
60
55
Payables
(30)
(30)
(31)
(26)
(35)
(31)
Salaries and wages
(10)
(10)
(10)
(10)
(10)
Receipts
Receivables
Payments
Electricity
Other overheads
(14)
(2)
(2)
Van purchase
(2)
(10)
(9)
(2)
(2)
(2)
(11)
Total payments
(42)
(42)
(68)
(38)
(47)
(52)
Cash surplus
18
10
(13)
17
13
Opening balance
12
30
40
27
44
57
Cash balance
30
40
27
44
57
60
Slide 9.20
Slide 9.21
Slide 9.22
Slide 9.23
Slide 9.24
Slide 9.25
Slide 9.26
An example of the inventories budget
Jan
Feb
Mar
Apr
May
June
000
000
000
000 000 000
Opening balance
30
30
30
25
25
25
Purchases
30
31
26
35
31
32
Inventories used
(30)
(31)
(31)
(35)
(31)
(32)
Closing balance
30
30
25
25
25
25
Slide 9.27
Note how the trade receivables, trade payables and inventories budgets in
Example 9.2 link to one another, and to the cash budget, for the same business in
Example 9.1. Note particularly that:
the purchases figures in the trade payables budget and in the inventories
budget are identical;
the cash payments figures in the trade payables budget and in the cash
budget are Identical;
the cash receipts figures in the trade receivables budget and in the cash
budget are identical.
Other values would link different budgets in a similar way.
For example, the row of sales revenue figures in the trade receivables budget would
be identical to the sales revenue figures that will be found in the sales budget.
This is how the linking (coordination), which was discussed earlier in this
chapter, is achieved.
Slide 9.28
Slide 9.29
Slide 9.30
Slide 9.31
Slide 9.32
Slide 9.33
Slide 9.34
Slide 9.35
Slide 9.36
Budgeting for control

We have seen that budgets provide a useful basis for exercising control over a
business as they provide a yardstick against which performance can be assessed.
We must, however, measure actual performance in the same terms as those in which
the budget is stated. If they are not in the same terms, valid comparison will not be
possible.
Exercising control involves finding out where and why things did not go
according to plan and then seeking ways to put them right for the future. One
reason why things may not have gone according to plan is that the budget targets
were unachievable. In this case, it may be necessary to revise the budgets for future
periods so that targets become achievable.
Slide 9.37
Slide 9.38
Flexing the budget

One practical way to overcome our difficulty is to flex the budget to what it
would have been had the planned level of output been 900 units rather than 1,000
units.
Flexing a budget simply means revising it, assuming a different volume of
output. To exercise control, the budget is usually flexed to reflect the volume that
actually occurred, where this is higher or lower than that originally planned. This
means that we need to know which revenues and costs are fixed and which are
variable relative to the volume of output. Once we know this, flexing is a simple
operation. We shall assume that sales revenue, material cost and labour cost vary
strictly with volume.
Flexible budgets enable us to make a more valid comparison between the
budget (using the flexed figures) and the actual results. Key differences, or
variances, between budgeted and actual results for each aspect of the businesss
activities can then be calculated.
Slide 9.39
Flexible budgets
A more valid comparison can be made between the budget
(using the flexed figures) and the actual results.
Original
budget
Output (production
and sales)
Flexed budget
1,000 units
Actual
900 units
900 units
Sales revenue
100,000
90,000
92,000
Direct materials
(40,000)
(36,000) (36,000m)
(36,900) (37,000m)
Direct labour
(20,000)
(18,000) (2,250 hr)
(17,500) (2,150 hr)
Fixed overheads
(20,000)
(20,000)
(20,700)
Operating profit
20,000
16,000
16,900
Slide 9.40
Where a variance between the flexed budget and the actual results
has the effect of making the actual profit lower than the budgeted
profit, it is known as an adverse variance.
The variance arising from the sales volume shortfall is, therefore an
adverse variance. Where a variance has the opposite effect, it is
known as a favourable variance.
Slide 9.41
Relationship between the budgeted and actual profit

Budgeted profit
plus
All favourable variances
minus
All adverse variances
equals
Actual profit
Figure 9.6
Relationship between the budgeted and actual profit

Slide 9.42
Slide 9.43
Frequency of use of flexible budgets

1 = Never
5 = Very often
30
29
25
23
20
19
%
15
16
13
10
44
8
5
0
Scale
Figure 9.8
Frequency of use of flexible budgets
Source: Based on information in Abdel-Kader, M. and Luther, R., Management accounting practices in the food and drinks industry, CIMA Research, 2006.
Slide 9.44
Variance analysis and business size

Small
Medium
Large
Very large
80
60
%
40
20
0
< 50
employees
Figure 9.9
50250
employees
25010,000 > 10,000

employees employees
Variance analysis and business size
Source: Figure adapted from Management accounting tools for today and tomorrow, CIMA, 2009, p. 12.
Slide 9.45
Making budgetary control effective

It should be clear from what we have seen of budgetary control that a system, or a set
of routines, must be put in place to enable the potential benefits to be gained. Most
businesses that operate successful budgetary control systems tend to share some
common features. These include the following:
A serious attitude taken to the system: This approach should apply to all levels of
management, right from the very top. For example, senior managers need to make
clear to junior managers that they take notice of the monthly variance reports and
base some of their actions and decisions upon them.
Clear demarcation between areas of managerial responsibility: It needs to be clear
which manager is responsible for each business area, so that accountability can more
easily be ascribed for any area that seems to be going out of control.
Budget targets that are challenging yet achievable: Setting unachievable targets is
likely to have a demotivating effect. There may be a case for getting managers to
participate in establishing their own targets to help create a sense of ownership.
This, in turn, can increase the managers commitment and motivation.
Slide 9.46
Established data collection, analysis and reporting routines: These should take
the actual results and the budget figures, and calculate and report the variances.
This should be part of the businesss regular accounting information system, so
that the required reports are automatically produced each month.
Reports aimed at individual managers, rather than general-purpose documents:
This avoids managers having to wade through reams of reports to find the part
that is re
levant to them.
Fairly short reporting periods: These would typically be one month long, so that
things cannot go too far wrong before they are picked up.
Timely variance reports: Reports should be produced and made available to
managers shortly after the end of the relevant reporting period.
Action being taken to get operations back under control if they are shown to be
out of control. The report will not change things by itself. Managers need to take
action to try to ensure that the reporting of significant adverse variances leads to
action to put things right for the future.
Slide 9.47
Slide 9.48
Slide 9.49
Slide 9.50
Slide 9.51

pp09

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

pp09

Caricato da

Copyright:

Formati disponibili

Slide 9.

Explain the budgeting process and the interlinking

Budgets and budgeting:

How budgets link with strategic plans and objectives:

1. Undertake a position analysis: This involves an assessment of where the business

How budgets link with strategic plans and objectives:

The planning and control process

Undertake a position analysis

Identify and assess strategic options

Revise plans (and budgets) if necessary

The planning and control process

Budgets and forecasts

Periodic and continual budgets

How budgets link to one another

The interrelationship of operating budgets

The interrelationship of operating budgets

The vertical relationship between sales budgets

Overall sales budget

The vertical relationship between a businesss sales budgets

How budgets help managers

The five main benefits of budgets to a business

Budgets are seen as having five main benefits to the business

Accuracy of revenue budgets

2650% over plan

1125% over plan

110% over plan

110% under plan

1125% under plan

>25% under plan

The accuracy of revenue budgets

An example of a budget the cash budget

Salaries and wages

An example of the inventories budget

000 000 000

Budgeting for control

Flexing the budget

(18,000) (2,250 hr)

(17,500) (2,150 hr)

Relationship between the budgeted and actual profit

Relationship between the budgeted and actual profit

Frequency of use of flexible budgets

Frequency of use of flexible budgets

Variance analysis and business size

25010,000 > 10,000

Variance analysis and business size

Making budgetary control effective

Potrebbero piacerti anche