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Week 7 budgeting - Lecture notes 7
Accounting (7111AFE)
Griffith University
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Budgeting QUESTIONS 1. Management accounting 2. Business budgets Week 7 NOTES From now on the topics in this course will focus more on the INTERNAL OPERATIONS of a firm, rather than on the preparation of EXTERNAL FINANCIAL REPORTS based on ACTUAL BUSINESS TRANSACTIONS. You will from now on hear only occasional references to Income Statements, Balance Sheets, and A L OE. They are still very relevant, but are no longer our focus. Most people are familiar with the concept of budgeting, as budgets are not just related to accounting. Individuals may prepare a household budget, a holiday budget etc Sports clubs prepare budgets for various functions Almost all organisations, in whatever field you are employed, are likely to have to prepare budgets of some kind For example: Budgeting for a restaurant Forecasting sales for a marketing firm Budgeting labour costs for the HR section of an organisation Budgeting travel costs for a global firm Features of budgeting What budgets are prepared? Basically whatever the firm wants to prepare Budgets use estimated figures (forecasts) Time period? Any length of time Linked with the strategies of the firm LINK WITH Strategies Strategic planning: longer term planning years). Typically incorporated in a BUSINESS PLAN Carried out senior management Relates to broad issues related to the directions for future, such as: expansion plans addition or deletion of business segments radical development SHORT TERM BUDGETS Operationalise strategic plans Are a quantitative expression of an overall business plan. Show how management intends to acquire and use resources to achieve objectives in the plan. Preferably NOT carried out senior management. Budgets are typically accompanied control elements to ensure that plans are achieved (See topic 8) How budgets are prepared Budgets are prepared based on management assumptions regarding such things as: State of the economy for planning period Adding, deleting or changing product lines Nature and degree of competition Effects of government regulation It is common to use past data, adjusted for future expectations. Is the preparation of budgets complex? estimating figures for the future is difficult? YES. Unless firms have an ability to predict the future with accuracy, this is an extremely difficult task. HOWEVER, once you are provided with the estimates, the preparation of the budget is quite a simple task. In this course you are provided with all estimates. Your task will be to insert those estimates into a budget. 3. Which budgets are prepared? The types of budgets prepared will depend in part on the type of firm. For example, the most extensive budgeting tends to be performed for a manufacturing firm. Fewer budgets exist in a service firm. Master budget Regardless of firm type, firms typically will have an overall budget (umbrella comprising all smaller budgets) called a MASTER BUDGET. A master budget may be viewed as a set of interrelated budgets for a particular future period. We will now briefly consider the components of manufacturing and service budgets. 3 Manufacturing budgets A master budget for a manufacturing firm is commonly classified into a set of operating budgets and financial budgets Operating All budgets up to and but not including the budgeted Income Statement Financial These include the budgeted Income Statement, budgeted Balance Sheet and Capital Expenditure Budget OPERATING BUDGETS include the following: Sales Budget (the starting point for manufacturers) Production Budget Purchases Budget only thing we know for certain is that cash is not received at the time of sale. Therefore we must estimate when the cash will be received. To do this, firms analyse the way that debtors typically pay their accounts, and use this to estimate when the receipt from a credit sale will occur. (YOU WILL ALWAYS BE GIVEN THIS ANALYSIS) For example, the lecture example says : the past the credit customers (accounts have paid their accounts as 60 percent in the first month 30 percent un the second 10 percent last month 5. ANALYSIS OF THE CASH BUDGET A review of the completed cash budget enables firms to make decisions about the most efficient use of cash resources. For example, does the firm have too much or too little cash at any time, and if so what can it do to change this? Note the bank overdraft situation try to avoid expense is costly. Are there any items that could be moved into another month? ways to improve cash position can not defer the tax or dividend payments perhaps the firm could postpone the building extensions until cash resources are available alternatively, obtain a loan specifically for the building extensions and then add interest and repayments into the cash budget Cash receipts may be increased measures such as: improving the collections of cash from debtors seeking ways to improve sales or fees reducing excessive levels of inventory arranging external finance extra capital contribution from the owners selling excess assets Cash payments may be reduced measures such as: cutting expenses identifying areas of waste, duplication or inefficiency making use of terms keeping inventory levels to only what is required, as excess inventory ties up cash and often adds to storage and handling costs deferring capital expenditure Management Planning is achieved via the budgeting process. Control is achieved managers comparing actual results with budgets. This is called and this comparison is often used for rewarding workers in firms. Investigating Variances Variances will be favourable or unfavourable. When investigating variances related to a cash budget: VARIANCES ARE FAVOURABLE (F) IF: Actual receipts are higher than budget Actual payments are lower than budget Final cash balance is higher than budget VARIANCES ARE UNFAVOURABLE (U) IF: Actual receipts are lower than budget Actual payments are higher than budget Final cash balance is lower than budget Once the first comparison between actual and budget is made, managers will: Investigate significant variances further (firms determine what is significant) Provided management can potentially change things to ensure improvements in the future (e. if the labour cost is expected because of an increase in the labour award, there is nothing management can do about that) purposes and advantages of budgeting CONSIDER THE FOLLOWING: DO FIRMS HAVE TO BUDGET? No there is no requirement. A firm could do very well DO WE FIND THAT MOST FIRMS BUDGET? Yes therefore there must be benefits of budgeting which exceed the costs of doing so Budgets enable organisations to better deal with the uncertainty of the future. Without planning, organisations only react to future events rather than anticipating them. PURPOSES OF BUDGETING Purpose : Formalise in writing plans in quantitative terms Express plans for coming periods Cause managers to think ahead, anticipate results and act to correct poor results Increase motivation to achieve stated goals remainder of the course. Budgeting and the budget process explained, its advantages and potential problems identified. Particular budgets identified. Focus on the cash budget preparation and uses of the budget. SUMMARY: Write 4 or more sentences describing specific learning from these notes. __ __ __ __ __
Week 7 budgeting - Lecture notes 7
Course: Accounting (7111AFE)
University: Griffith University
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