accounting & financial analysis 11 lecture 5 b budgets

Accounting & Financial Analysis 11

Lecture 5 B

Budgets

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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The following textbook is the source of this lecture.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Chapter 1 Budgeting fundamentals

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Budgeting fundamentals

Budgeting is the process used to develop:

A formal written statement

Of managements plans for the future

Expressed in financial terms

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Types of plans

Long term: 5 to 10 years

Medium term: 1 to 5 years

Short term: up to 1 year

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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The planning cycle

Comparison of actual results to budget variance

Budgets Performance

Budgets are the mechanism by which management control of an organisation becomes possible.

Revise

Plan Action Results

Remedy

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Benefits of budgets

1. Forces managers to do planning.

2. Realistic performance targets.

3. Basis for controlling what happens within the organisation.

4. Helps coordinate the activities of the various centres that make up the business.

5. Communication – managers exchange information on ideas, etc.

6. Motivating tool – if the process involves

staff.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Limitations of budgets

Only estimates, not statements of facts. No substitute for sound management

practices. Need to be amended if circumstances

change. Preparation does not guarantee success. Aspects of people’s behaviour may

undermine the value of the process.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Budget classification

Static (fixed) budgets: prepared for one level of activity, usually around the forecasts made for sales.

Flexible budgets: a series of fixed budgets set to different levels of sales activity within which the organisation may operate.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Cost/volume relationships

Fixed costs: in total remain the same for a period of time and over a particular range of activity.

Variable costs: in total tend to change as the level of activity changes.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Budget processes

Zero-based budgeting: sets the initial figures for each activity to zero.

Period budgets: developed for a specific period of time, e.g. a month.

Rolling (continuous) budgets: are continually updated by periodically adding a new incremental time period and dropping the period just completed.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Types of budgets

Revenue budgets: estimates of the income of an organisation from the sale of goods and/or provision of services for a specific period.

Operating budgets: estimate activities that will affect profit.

Budgeted financial statements: show the estimated results and projected financial position of a business. That is budgeted revenue, balance sheet and statement of cash flows.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Master budget

A combination of all the budgets of an organisation.

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Master budget

Merchandising firm

Professional services

Manufacturing firm

Sales budget Fees or fees & sales budget

Sales budget

Purchases budget

Professional & support labour budget

Cost of production budget

Cost of goods sold budget

Cost of supplies used

Cost of goods sold budget

Other operating expense budgets

Other operating expense budgets

Other operating expense budgets

Copyright 2003 McGraw-Hill Australia Pty LtdPPTs t/a Budgeting, second edition, by Banks & Giliberti

Slides prepared by Mya Aronfeld

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Master budget

Irrespective of the type of organisation, the following budgets will be part of the master budget: Statement of financial performance

[revenue budget] Statement of financial position [balance

sheet] Statement of cash flow