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Life Impact The University of Adelaide
Management AccountingBudgeting
Accounting for Decision Makers Topic 11
Introduction to Management Accounting
Slide 1 Life Impact The University of Adelaide
Learning Objectives
• understand the link between strategic planning andbudgeting
• list the key steps in the budgeting process
• identify the different types of budgets
• outline the components of a master budget and prepare amaster budget
• prepare a schedule of receipts from debtors and a cashbudget
• outline the issues associated with the behavioural aspects ofbudgeting
Introduction to Management Accounting
Slide 2 Life Impact The University of Adelaide
Management Activities
Planning
• Set business goals• Identify Resources Needed• Budgeting / Capital Investment
Operating
• Day to day decisions• CVP / Pricing Decisions
Evaluating
• Measure performance• Continuous Improvement
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Introduction to Management Accounting
Slide 3 Life Impact The University of Adelaide
BUDGETING AND STRATEGIC PLANNING
• Strategic planning concerns longer term planning(typically, 3-5 years)
• It is usually carried out by senior management
• It commonly relates to broader issues such asbusiness takeovers, expansion plans, deletion ofbusiness segments, and radical product/servicedevelopment
Introduction to Management Accounting
Slide 4 Life Impact The University of Adelaide
BUDGETING AND STRATEGIC PLANNING
• Budgeting is a process that focuses on short term
• Budgets operationalise strategic plans and allow operationalareas to understand how their area contributes to theentity’s strategic objectives
Introduction to Management Accounting
Slide 5 Life Impact The University of Adelaide
BUDGETS
• Entities engage in a planning process that requiresinvolvement in a budgeting process
• Part of the formal planning process relates to an entity’soperational plans, including short term goals and targets
• Performance management involves setting targets inother than just financial terms
e.g., improving customer service, corporategovernance, management techniques, andhuman resource management
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Introduction to Management Accounting
Slide 6 Life Impact The University of Adelaide
BUDGETS
• A budget is the quantitative expression of an entity’splans
• Budgeting can assist in decision making by:
– putting into operation longer term plans– setting targets for managers– identifying resource constraints in budget period– identifying periods of expected cash shortages and
excess cash holdings– assisting with short-term planning decisions, such as
capacity utilisation
Introduction to Management Accounting
Slide 7 Life Impact The University of Adelaide
BUDGETS
– providing profit forecasts and other financial data to thecapital markets
– forecasting data such as sales or fees, which commonlyset the level of activity for the budget period
– helping determine required inventory levels andpurchasing requirements for raw materials
– planning labour and other inputs
– determining the ability of the entity to meet financingcommitments
Air Asia
Introduction to Management Accounting
Slide 8 Life Impact The University of Adelaide
The budgeting process
1. Consideration of past performance
2. Assessment of expected trading and operating conditions
3. Preparation of initial budget estimates
4. Adjustment to based on communication with managers
5. Preparation of budgeted reports and sub-budgets
6. Monitoring of actual performance against the budget
7. Making any necessary adjustments to the budget
http://www.youtube.com/watch?v=8PDWXt6CHyA&feature=fvsrhttp://www.youtube.com/watch?v=8PDWXt6CHyA&feature=fvsr
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Introduction to Management Accounting
Slide 9 Life Impact The University of Adelaide
Introduction to Management Accounting
Slide 10 Life Impact The University of Adelaide
Introduction to Management Accounting
Slide 11 Life Impact The University of Adelaide
TYPES OF BUDGETS
• Sales (or fees) budget
• Operating (expenses) budget
• Production and inventorybudgets
• Purchases budget
• Budgeted income statement
• Cash budget
• Budgeted balance sheet
• Capital budgets
• Manufacturing overheadbudget
• Program budget
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Introduction to Management Accounting
Slide 12 Life Impact The University of Adelaide
Master budget
Master budget – set of interrelated budgets:
• operating budgets (sales and production) lead tobudgeted statement of financial performance
• financial budgets (cash budget and budgetedstatement of financial position) concern cashresources for expected operations and capitalexpenditure
• Budget can be used as a control tool to monitor theentity’s achievement of its plans, classification ofitems included in the master budget needs to mirrorthe entity’s chart of accounts
• Budgets are forecasts about the future, completeaccuracy is impossible and variances will inevitablyarise
Introduction to Management Accounting
Slide 13 Life Impact The University of Adelaide
Master budget
Introduction to Management Accounting
Slide 14 Life Impact The University of Adelaide
Interconnection Sales & Production
Sales
Production
Materials& Labour
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Introduction to Management Accounting
Slide 15 Life Impact The University of Adelaide
Sales budget• Develop the sales budget
Introduction to Management Accounting
Slide 16 Life Impact The University of Adelaide
Production budget
• Develop the production budget
Introduction to Management Accounting
Slide 17 Life Impact The University of Adelaide
Materials budget• Develop the materials budget
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Introduction to Management Accounting
Slide 18 Life Impact The University of Adelaide
Labour budget• Develop the labour budget
Introduction to Management Accounting
Slide 19 Life Impact The University of Adelaide
Operating Expenses budget
• Develop the operating expenses budget
Introduction to Management Accounting
Slide 20 Life Impact The University of Adelaide
PREPARING OPERATING BUDGETS
Budgeted income statement – end-point of operatingbudgets
– shows expected profitability for budget period (mayneed to explore alternative strategies using Cost-Volume-Profit analysis if budgeted outcome is notwhat we want)
– combines individual operating budgets plus additionalexpenses (e.g. interest, taxes)
– forms basis for performance evaluation
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Introduction to Management Accounting
Slide 21 Life Impact The University of Adelaide
PREPARING CASH BUDGETS• The cash budget is a statement of expected future
cash receipts and payments
• It assists decision making by:
– documenting timing of all cash receipts andpayments
– helping to identify periods of expected cashshortages and surpluses
– identifying suitable times for purchase of non-current assets
– assisting with planning and use of borrowed funds– providing a framework for ‘what if’ analysis
Introduction to Management Accounting
Slide 22 Life Impact The University of Adelaide
PREPARING CASH BUDGETS
Introduction to Management Accounting
Slide 23 Life Impact The University of Adelaide
PREPARING CASH BUDGETS
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Introduction to Management Accounting
Slide 24 Life Impact The University of Adelaide
PREPARING CASH BUDGETS
Cash budget – three sections:
– cash receipts: expected cash inflows from customers,interest, dividends, planned sales of assets andshares
– cash payments: expected cash outflows for directmaterials and labour, overheads, selling &administration costs, taxes, dividends, assets
– financing: expected cash borrowings and repaymentsof borrowings
Introduction to Management Accounting
Slide 25 Life Impact The University of Adelaide
PREPARING CASH BUDGETS
Cash budget combines ending cash balance fromprevious period plus details from other budgets
– annual cash budget often detailed on monthly basisto reflect anticipated levels of activities
– helps plan for cash excesses and shortfalls
Introduction to Management Accounting
Slide 26 Life Impact The University of Adelaide
PREPARING CASH BUDGETS
• For an entity that provides goods or services on credit, oneof the main tasks in the preparation of a cash budget iscalculating the cash receipts from the credit sales or feesgenerated
• This is commonly shown in a schedule of receipts fromdebtors/accounts receivable
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Introduction to Management Accounting
Slide 27 Life Impact The University of Adelaide
schedule of receipts from debtors
Introduction to Management Accounting
Slide 28 Life Impact The University of Adelaide
3 month cash budget
Introduction to Management Accounting
Slide 29 Life Impact The University of Adelaide
PREPARING FINANCIAL BUDGETS
Budgeted balance sheet – projected financial position atend of budget period
– combines previous period’s budgeted financial positionand budgets for current period (sales, direct materials,direct labour, overheads, selling and administrationbudgets)
– similar format to that prepared for external users
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Introduction to Management Accounting
Slide 30 Life Impact The University of Adelaide
BUDGETS: PLANNING AND CONTROL
• The preparation of the cash budget is an important part of
the planning process
• It can then be used for monitoring cash performance, alsoknown as the control process
• A cash budget prepared on a month-by-month basis ismuch more useful for this purpose than one prepared on aquarterly or yearly basis
Introduction to Management Accounting
Slide 31 Life Impact The University of Adelaide
BUDGETS: PLANNING AND CONTROL
Introduction to Management Accounting
Slide 32 Life Impact The University of Adelaide
Cash budget Variance report
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Introduction to Management Accounting
Slide 33 Life Impact The University of Adelaide
IMPROVING CASH FLOW
• Cash inflow may be increased by:
– improving the collections of cash from debtors– seeking ways to improve sales or fees– reducing unnecessary stock levels– arranging external finance– providing an extra capital contribution from the
owners, or considering a change in ownership structure– selling excess non-current assets
Introduction to Management Accounting
Slide 34 Life Impact The University of Adelaide
IMPROVING CASH FLOW
• Cash outflow may be reduced by:
– cutting expenses by identifying areas of waste,duplication or inefficiency
– making use of creditors’ terms – keeping inventory levels to only what is required, as
excess inventory ties up cash and often adds tostorage and handling costs
– deferring capital expenditures
Introduction to Management Accounting
Slide 35 Life Impact The University of Adelaide
RESPONSIBILITY ACCOUNTING
Accumulating and reporting costs and revenuesaccording to managers with authority to makedecisions concerning the items
– personalises management accounting systems– performance reports relate only to controllable items– effectiveness can be measured and reported at all
management levels
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Introduction to Management Accounting
Slide 36 Life Impact The University of Adelaide
ROI
RESPONSIBILITY ACCOUNTINGEXAMPLE: PERFORMANCE MEASUREMENT
Introduction to Management Accounting
Slide 37 Life Impact The University of Adelaide
BEHAVIOURAL ASPECTS OF BUDGETING
• Like all decision-making processes, budgeting is affectedby human behaviour, attitudes and assumptions
• These are seen in the management styles adopted in thebudget process
Introduction to Management Accounting
Slide 38 Life Impact The University of Adelaide
BEHAVIOURAL ASPECTS OF BUDGETING
• In an authoritarian management style of budgeting :– senior management simply sets the targets and the
budget for unit managers– unit managers have little say in the targets that are set
• In a participative style of budgeting:– targets and budgets are arrived at by a process of
discussion and negotiation between senior managementand unit managers
– unit managers are seen to have had a say in the settingof targets and the budget
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Introduction to Management Accounting
Slide 39 Life Impact The University of Adelaide
Game Playing - BEHAVIOURAL ASPECTS OF BUDGETING
• The behavioural aspects of budgeting are also seen in the
attempts by some line managers to:
– overstate planned expenditure or understate plannedrevenue or receipts
– include some margin for error in case targets are notmet
– manipulate information so that their performance ispresented in the best possible light
Introduction to Management Accounting
Slide 40 Life Impact The University of Adelaide
Summary
• Strategic planning influences shorter term aspects ofthe budgetary planning process
• A master budget may be viewed as a set of interrelatedbudgets for a future period
• A master budget is commonly classified into a set ofoperating budgets and financial budgets
• The behavioural aspects of budgeting relate to thehuman involvement in decision making