accounting lecture
TRANSCRIPT
-
7/27/2019 accounting Lecture
1/35
BAO6504Accounting for Management
Lecture 9
Budgeting
Incremental Analysis
Reference: Chapters 17 & 18
-
7/27/2019 accounting Lecture
2/35
2
BUDGETING BASICS
Abudget is a formal written statement ofmanagements plan for specified future time
period, expressed in financial terms The budget is used as a basis for:
Controlling operations
Evaluating performance
A budget promotes efficiency and serves todeter waste and inefficiency
-
7/27/2019 accounting Lecture
3/35
3
Budgeting and accounting
Accounting is used to expressbudgetary goals in financial terms
Budgets use historical data onrevenues, costs and expenses
Periodic budget reports are prepared
which management uses to compareactual results with planned objectives
-
7/27/2019 accounting Lecture
4/35
4
Benefits of budgeting
1. Requires management to plan ahead
2. Provides definite financial objectives for all levels
of responsibility
3. Creates an early warning system for problems
4. Facilitates coordination of activities
5. Results in greater management awareness ofoperations and external factors
6. Contributes to positive behaviour patterns
-
7/27/2019 accounting Lecture
5/35
5
Essentials of effective
budgeting
Clearly defined areas of authority and responsibility
Realistic goals Acceptance by all levels of management
Participation by managers in setting budgets
Review of differences between actual and expected
results
-
7/27/2019 accounting Lecture
6/35
6
Length of the budget period
A budget may be prepared for any
period of time Most common budget period is one year
This annual budget is often
supplemented with quarterly andmonthly budgets
-
7/27/2019 accounting Lecture
7/35
7
The budgeting process
The development of next years budget begins before end of
current year
The budget starts with a sales forecast which should
consider:
General economic conditions
Industry trends
Market research studies
Anticipated advertising and promotion
Previous market share
Changes in prices
New products
Technological developments
-
7/27/2019 accounting Lecture
8/35
8
Budgeting and long-range planning
Long-range planning is a formalised process of
Selecting strategies to achieve long-term goals, and
Developing policies and plans to implement thestrategies
Usually encompasses 35 years
Long-range budgets
Contain less detail than annual budgets
Have a strategic emphasis
-
7/27/2019 accounting Lecture
9/35
9
The master budget
The master budget is a set of interrelated budgets
It consists of:
Operating budgets (sales and production) which lead to
the budgeted income statement
Financial budgets (cash budget and budgeted balance
sheet) that are concerned with cash resources forexpected operations and capital expenditure
-
7/27/2019 accounting Lecture
10/35
10
-
7/27/2019 accounting Lecture
11/35
11
Cash budget
This budget shows anticipated cash flows
It combines ending cash balance from previous
period plus details from other budgets
The annual cash budget is often detailed on monthly
basis to reflect anticipated levels of activities
It helps plan for cash excesses and shortfalls
-
7/27/2019 accounting Lecture
12/35
12
Cash budget continued
The cash budget has three sections:
Cash receipts: expected cash inflows from customers,
interest, dividends, planned sales of assets and shares
Cash payments: expected cash outflows for direct materials
and labour, overheads, selling & administration costs, taxes,
dividends, assets
Financing: expected cash borrowings and repayments of
borrowings
-
7/27/2019 accounting Lecture
13/35
13
Budgeted income statement
The budgeted income statement is the end product
of the operating budgets
It shows expected profitability for budget period
It combines individual operating budgets plus
additional expenses (e.g. interest, taxes)
It forms a basis for performance evaluation
-
7/27/2019 accounting Lecture
14/35
-
7/27/2019 accounting Lecture
15/35
15
Merchandising entities
Sales budget is the starting point
Sales budget drives the master budget
Master budget incorporates departmental budgets
Purchases budget used instead of production budget
Purchases budget shows estimated cost of goods
needed to meet sales
-
7/27/2019 accounting Lecture
16/35
16
Service entities
Expected output drives master budget
Levels of staff planned to match anticipated levels of
service
Profitability affected by: overstaffing (excessive labour costs) and
understaffing (client dissatisfaction thus low revenue)
Service revenue determined by billing time andservices offered
-
7/27/2019 accounting Lecture
17/35
17
BUDGETARY CONTROLCOMPONENTS
cont.
-
7/27/2019 accounting Lecture
18/35
18
Management by exception
Budget reports reviewed when actual andbudgeted results differ significantly
Management focus on problem areas
Two guidelines are generally used to identifylevel of significance:
Materiality: variance from budget by more than apredetermined amount
Controllability: ability of manager to influence item
-
7/27/2019 accounting Lecture
19/35
19
THE CONCEPT OFRESPONSIBILITY ACCOUNTING
Involves accumulating and reporting costs and
revenues on the basis of the managers with authority
to make decisions concerning the items
Personalises management accounting systems
Performance reports relate only to controllable items
Effectiveness can be measured and reported at all
management levels
-
7/27/2019 accounting Lecture
20/35
20
THE CONCEPT OFRESPONSIBILITY ACCOUNTING
continued
Especially valuable in a decentralised entity
Decentralisation means that control has been
delegated to many individual managers throughoutthe organisation
Asegment is an area of responsibility within
decentralised organisation
Each manager prepares regular reports for individualarea of responsibility
THE CONCEPT OF
-
7/27/2019 accounting Lecture
21/35
21
THE CONCEPT OFRESPONSIBILITY
ACCOUNTING continued
-
7/27/2019 accounting Lecture
22/35
22
TYPES OF RESPONSIBILITY CENTRES
Cost centres
Incur costs but do not directly generate revenues
Managers evaluated on ability to control costs
Examples:
production departments
service centres
Profit centres
Incur costs but also generate revenues Managers evaluated on profitability of their centres
Examples:
Individual departments of a retail store
Branch offices of banks
-
7/27/2019 accounting Lecture
23/35
23
TYPES OF RESPONSIBILITYCENTRES continued
Investment centres
Incur costs, generate revenues and
have control over investment fundsavailable for use
Managers evaluated on:
Profitability of the centre Rate of return earned on funds used
-
7/27/2019 accounting Lecture
24/35
24
Part 2: INCREMENTAL ANALYSIS
The process of identifying relevant financial data that
changes under alternative courses of action
This may affect costs and/or revenues
It may also affect decisions on future earnings
It involves estimates and uncertainty
Alternatives are evaluated using financial data
-
7/27/2019 accounting Lecture
25/35
25
How incremental analysisworks
Important to recognise that:
Variable costs may not differ
Fixed costs may change according toalternatives
Three important concepts:
1. Relevant costs2. Opportunity costs
3. Sunk costs
-
7/27/2019 accounting Lecture
26/35
26
How incremental analysisworks continued
Relevant Costs
Focus only on those costs and revenues that differ
across alternatives
Opportunity Costs
Refers to the potential benefit that must be given
up because one course of action is chosen rather
than another
e.g. If a machine is used to make one product, the benefit
of making another product with that machine is lost
-
7/27/2019 accounting Lecture
27/35
27
How incremental analysisworks continued
Sunk Costs
Refers to costs that have already been incurred
and will not be changed or avoided by any futuredecision
e.g. If you have already purchased a machine and now a
newer, more efficient machine is available, the
carrying cost of the original machine is a sunk cost andhas no bearing on future decisions
Sunk costs are not relevant costs
-
7/27/2019 accounting Lecture
28/35
28
Types of incremental analysis
1. Accept an order at a special price
2. Make or buy component parts orfinished products
3. Sell products or process them further
4.
Retain or replace equipment5. Eliminate an unprofitable business
segment
Examples provided in Chapter 18, pp 1060-1065
-
7/27/2019 accounting Lecture
29/35
29
Types of incremental analysiscontinued
Accept an order at a special price
Decision to accept or not depends on: Revenues and costs that would change if
the order was accepted (relevant data)
Effects on other markets and customers
Whether excess production capacity existsor not
-
7/27/2019 accounting Lecture
30/35
30
Types of incremental analysiscontinued
Make or buy
Manufacturing or outsourcing items
depends on: Relevant costs
Productive capacity that cannot be better
used elsewhere (opportunity costs)Analysis of qualitative factors
(e.g. effects on employees, stability ofbusiness environment)
-
7/27/2019 accounting Lecture
31/35
31
Types of incremental analysiscontinued
Sell or process further
Selling item as it is or undertaking
further processing depends on: Incremental revenue exceeding
incremental costs
Consideration of only relevant data Qualitative factors (e.g. reliability of
alternative outsourcing)
-
7/27/2019 accounting Lecture
32/35
32
Types of incremental analysiscontinued
Retain or replace equipment
Decision to replace equipment or continue
using existing assets depends on: Costs that change plus cost of new equipment
Remembering carrying cost of existing asset is
irrelevant (sunk cost) Revenue from sale of existing asset is relevant
(e.g. trade-in or cash value)
-
7/27/2019 accounting Lecture
33/35
33
Types of incremental analysiscontinued
Eliminate an unprofitable segment
Retention or elimination of business segment depends on:
Analysis of relevant data (variable and fixed costs plus
revenues)
Basis of analysis usually instigated from lack of
profitability Consideration of qualitative effects
(e.g. sales of related product lines, employee
conditions)
-
7/27/2019 accounting Lecture
34/35
34
Outsourcing
Refers to utilising experts from outside the entity to
perform specific tasks
It enables management to spend less time on areas
where it has limited expertise
Examples
IT is becoming increasingly sourced Fuji Zerox offers services to manage documents, print-room
facilities and office equipment
-
7/27/2019 accounting Lecture
35/35
35
Qualitative factors
Quantitative factors refer to those attributes that can
be expressed easily in terms of numbers or dollars
Qualitative factors may also have important potential
effects on decision making, but may be difficult to
measure
Example How will closing an area of operations affect the community
where factory is located?