Fundamentals Of Management Accounting

Budgeting

Fundamentals Of Management Accounting

Class Slides – Ian Wilson

1. Explain why a company will set out its plans for a financial year in a budget.

2. Prepare functional budgets & Capital Expenditure/Depreciation budgets.

3. Prepare a Master Budget.4. Explain Budget statements5. Identify Budget surplus or shortfalls in cash

terms6. Prepare a ‘Flexible’ Budget7. Calculate Budget Variances8. Prepare a reconciliation between Budget &

Actual results

� We need to cover the following areas:

1. Budget preparation

2. Sales Budgets

3. Functional Budgets

4. Cash Budgets

5. Income Statements

6. Balance Sheets

7. Master Budgets

8. Flexed Budgets

� Registers – e-mails – Breaks – Revision

� Mobile phones on silent

� Completed :

� 1st 5 Chapters – Revise content & attempt end of chapter questions

� Today:

� Budgets Chapter 6 Notes

� Depending on time, Standard Costing –Chapter 7

� Why do you as individuals Budget?Why do you as individuals Budget?Why do you as individuals Budget?Why do you as individuals Budget?

� Think about a company Think about a company Think about a company Think about a company –––– what do they need what do they need what do they need what do they need to do!to do!to do!to do!

� Business planning at Pepsi was “The Plan is nothing… but Planning is everything.”

� People just didn’t budget at Pepsi, they made commitments.

� “The budget should be a numerical expression of the strategic plan.” I really love that, it says so much with so few words.

� A Budget, What is it?.A Budget, What is it?.A Budget, What is it?.A Budget, What is it?.

� ‘a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows for a forthcoming accounting period’.

� A budget (from old French word bougette, purse) is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending

� Budgets are prepared toBudgets are prepared toBudgets are prepared toBudgets are prepared to:

1. Set & communicate targets

2. Establish a standard to which actual performance can be compared

3. Co-ordinate inter/intra functional activities

Both functional budgets & a master budget can be prepared

Remember P:D/M:C

� Typical functional budgetsTypical functional budgetsTypical functional budgetsTypical functional budgets:

1. Sales Budget

2. Sales Overhead Budget

3. Production Budget

4. Materials Usage Budget

5. Materials Purchase Budget

6. Labour Budget

� A ‘MASTER’ BUDGET will include:

1. Income Statement

2. Cash Budget

3. Balance Sheet (Statement of Financial Position)

Budget construction is overseen by a BUDGET COMMITTEE who often produce a BUDGET MANUAL.

� Contains the followingContains the followingContains the followingContains the following:

1. Objectives behind the Budget

2. Lists of organisational structures, Major Budgets & Budget responsibility

3. Procedures & control

4. Timetables

5. Key assumptions made

6. Principle Budget Factors (PBF’s)

� Functional budgets prepared BEFORE the Master Budget.

� Many Budget changes can be expected and are made before a final version is complete.

� Process begins with identifying the PBF(Principal Budget Factor)

� This is a ‘Limiting factor’.

� Sales, Labour Materials & Cash may all be PBF’s.

� See pages 76 to 80 for Budget preparation practice & examples.

� Exercise 1 Sales Budgets

� Exercise 2 Planning Production

� Exercise 3 Material Needs –Usage & Purchases

� Exercise 4 Labour Budgets

� Truro Ltd

1. Prepare Production Budget

2. Prepare Direct Labour Budget

� Dealing with Stocks/Inventory:

� Sales

� PLUS Closing Stock

� LESS Opening Stock

� = Production Units

� Production

� PLUS Closing Stock

� LESS Opening Stock

� = Material Usage

� Material Usage

� ADD Closing Stock

� LESS Opening Stock

� = Materials Purchases

� LABOUR EFFICIENCY:

� If Efficiency is 80%, 20% of hours is wasted

� To make product, input hours need to be enough to make 100% of product.

� What is a Cash Budget?What is a Cash Budget?What is a Cash Budget?What is a Cash Budget?.

� Recording of the cash impacts of the functional budgets and is used as a planning tool to deal with a cash surplus/deficit positions.

1. Short term cash surplus

2. Short term cash deficit

3. Long term cash surplus

4. Long term cash deficit

� Golden rules:

� Cash items only NO DEPRECIATION

� Timing - when cash impacts

� Exercise 6 X Ltd Constructing a Cash Budget

� Produce a Pro-Forma, that is the best approach

� Set up your grid, Rows & Columns, Columns for each month – January to April.

� You need rows for each type of revenue & expense

� Deal with the ‘easy’ items first

� Machine – Cost $50K in January BUT PAID IN FEBRUARY!.

� Rent $10K per month, paid in JAN & APRIL

� Rates - $1K per month

� Salaries – 2 parts to this: 80% paid in month & 20% paid next month as this is overtime

� You need an 80:20 split ie $8K & $2K per month

� The remaining issue to the difficult one, Sales!.

� Sales are made each month of:1. Jan - $50K2. Feb - $60K3. Mar - $40K4. April - $50K

� Each month, Sales RECEIPTS in CASH are phased in at: 60% after 1 month, 30% after 2 months & 10% after 3 months.

� You have to produce a model that reflects this position:

� We also made Sales LAST year:

� Some cash proceeds will fall into THIS year

� Work this through also:

� We can now BALANCE each month:

� The MASTER BUDGET is an additional & vital BUDGET prepared after the FUNCTIONAL BUDGETS are known

� For your C1 exam, the master budget will include:

1. Budgeted Income Statements (IS)

2. Budgeted Statement of Financial Position (SFP)

� This is a Profit & Loss Account

� Students may be given a partially completed Income Statement on screen and asked to complete with missing figures.

� Pro-Forma on page 83

� A student may be asked to calculate key balance sheet figures.

� This could involve either updating a current balance sheet for a trading period or drafting a balance sheet for a new business.

� Pro-forma on page 84

� Exercise 7 Budgeted Balance Sheet

� All we have looked at to-date centre of ‘Fixed’ Budgets.

� We now have to consider ‘Flexible’ Budgets.

� A ‘Flexed’ budget considers varying levels of activity.

� ‘a budget by which, by recognising different cost behaviour patterns, is designed to change as volume of activity changes’

� Relatively straightforward to produce as they use marginal costing principles.

� Fixed & Variable Costs are straightforward

� Care needs to be taken with Semi-Variable Costs.

� You may have to use the High-Low method, see earlier sessions.

� Exercise 8 Flexing a Budget