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Slide 9.
Chapter 9
BUDGETING
Atrill and McLaney, Accounting and Finance for Non-Specialists PowerPoints on the Web, 8th edition Pearson Education Limited 2013
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
The planning
and control
process
Establish mission and objectives

Undertake a position analysis
Identify and assess strategic options
Select strategic options and formulate longterm (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
Slide 9.4
The interrelationship of operating budgets

Trade
receivables
budget
Sales
budget
Overheads
budget
Finished
inventories
budget
Trade
payables
budget
Cash
budget
Capital
expenditure
budget
Production
budget
Direct
labour
budget
Raw
materials
purchases
budget
Raw materials
inventories
budget
Slide 9.5
The vertical relationship between a businesss sales budgets
Overall sales budget
Sales budget
North region
Sales budget
South region
Sales budget
East region
Sales budget
West region
Slide 9.6
The five main benefits of budgets to a business
Promote forward
thinking and
identification of
short-term
problems
Budgets
Help coordinate
the various
sections of the
business
Motivate
managers
to better
performance
Provide a basis
for a system of
control
Provide a
system of
authorisation
Slide 9.7
The accuracy of revenue budgets

>50% over plan
2%
2650% over plan
2%
11 25% over plan
12%
1 10% over plan
27%
11%
Came in on plan
1 10% under plan
28%
11 25% under plan
10%
3%
>25% under plan
5%
Dont know
0
10
15
(%)
20
25
30
Source: Perfect how you project, BPM Forum, 2008.

Slide 9.8
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
10
Receipts
Receivables
Payments
Electricity
Other overheads
14
2
Van purchase
9
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 9.9
An example of a trade receivables budget
Jan
000
Feb
000
Mar
000
Opening balance
60
52
55
55
60
55
Sales revenue
52
55
55
60
55
53
Cash receipts
(60)
(52)
(55)
(55)
(60)
(55)
52
55
55
60
55
53
Closing balance
Apr May June

000 000 000
Slide 9.10
An example of a trade payables budget
Jan
000
Feb
000
Mar
000
Opening balance
30
30
31
26
35
31
Purchases
30
31
26
35
31
32
(30)
(30)
(31)
(26)
(35)
(31)
30
31
26
35
31
32
Cash payment
Closing balance
Apr May June

000 000 000
Slide 9.11
An example of an inventories budget
Jan
000
Feb
000
Mar
000
Apr May June

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 9.12
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)
1,000 units
Flexed budget
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 9.13
Relationship between the budgeted and actual profit

Budgeted profit
plus
All favourable variances
minus
All adverse variances
equals
Actual profit
Slide 9.14
Degree of importance attached to flexible budgeting
Not important
27%
Moderately
important
40%
Important
33%
Source: Based on Information in Abdel-Kader, M. and Lauther, R., Management accounting practices in the food and drinks Industry. CIMA Research, 2006.
Slide 9.15
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
Source: Based on information in Abdel-Kader, M. and Luther, R., Management accounting practices in the food and drinks industry, CIMA Research, 2006.
Slide 9.16
Making budgetary control effective

A serious attitude taken to the system
Clear demarcation between areas of managerial
responsibility
Budget targets that are challenging yet
achievable
Established data collection, analysis and
reporting routines
Reports aimed at individual managers
Fairly short reporting periods
Timely variance reports
Action being taken to get operations back
under control
Slide 9.17
Behavioural aspects of budgetary control
The existence of budgets generally tends to improve

performance
Demanding, yet achievable, budget targets tend to

motivate better than less demanding targets
Unrealistically demanding targets tend to have the

adverse effect on managers performance
The participation of managers in setting their targets

tends to improve motivation and performance
Slide 9.18
Variance analysis and business size

Small
Medium
Large
Very large
80
60
%
40
20
<50
employees
50250
employees
>10,000
25010,000
employees employees
Source: Figure adapted from Management accounting tools for today and tomorrow, CIMA, 2009, p. 12.

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Slide 9.

Explain the budgeting process and the interlinking

Establish mission and objectives

The interrelationship of operating budgets

The vertical relationship between a businesss sales budgets

Overall sales budget

The five main benefits of budgets to a business

The accuracy of revenue budgets

2650% over plan

11 25% over plan

1 10% over plan

11 25% under plan

>25% under plan

Source: Perfect how you project, BPM Forum, 2008.

An example of a budget the cash budget

Salaries and wages

An example of a trade receivables budget

Apr May June

An example of a trade payables budget

Apr May June

An example of an inventories budget

Apr May June

(18,000) (2,250 hr)

(17,500) (2,150 hr)

Relationship between the budgeted and actual profit

Degree of importance attached to flexible budgeting

Frequency of use of flexible budgets

Making budgetary control effective

Behavioural aspects of budgetary control

The existence of budgets generally tends to improve

Demanding, yet achievable, budget targets tend to

Unrealistically demanding targets tend to have the

The participation of managers in setting their targets

Variance analysis and business size

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