HA2011 MANAGEMENT ACCOUNTING Topic 7 Budgeting

Budget
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Purposes of budgeting
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Responsibility accounting
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The annual budget: a planning tool
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Budget processes
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Behavioural consequences of budgeting
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Participative budgeting
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Zero base budgeting and program budgeting
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Flexible budgets
Budget
Budget
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•A detailed plan of future operating activitiesA detailed plan of future operating activities
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•A financial model of future operationsA financial model of future operations
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•A core component of an organisation’s A core component of an organisation’s planning and control systemplanning and control system
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•A critical way of providing information to A critical way of providing information to managersmanagers
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•Regarded as shortRegarded as short–term planning, typically term planning, typically for one yearfor one year
Budget (cont.)
Budget (cont.)
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•Budgets are developed for specific time Budgets are developed for specific time periodsperiods
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•Rolling budgets are continually updated by Rolling budgets are continually updated by adding a new time period and dropping the adding a new time period and dropping the period just completedperiod just completed
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•Budgets vary in their level of detail, often Budgets vary in their level of detail, often dependent on the size and complexity of the dependent on the size and complexity of the organisationorganisation
Purposes of Budgeting
Purposes of Budgeting
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•PlanningPlanning

-Expresses a plan of action in financial termsExpresses a plan of action in financial terms
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•Facilitating communication and Facilitating communication and coordinationcoordination

-Provides a formal mechanism to enable Provides a formal mechanism to enable communication and coordinationcommunication and coordination
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•Allocating resourcesAllocating resources

-Provides a way of allocating limited resources Provides a way of allocating limited resources among competing usersamong competing users
Purposes of Budgeting (cont.)
Purposes of Budgeting (cont.)
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•Controlling profit and operationsControlling profit and operations

-The budget can serve as a benchmark for The budget can serve as a benchmark for comparing actual results comparing actual results
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•Evaluating performance and providing Evaluating performance and providing incentivesincentives

-Comparing actual results with a budget helps Comparing actual results with a budget helps managers evaluate performancemanagers evaluate performance

-Achievement of budget targets may be linked to Achievement of budget targets may be linked to the payment of cash rewards or profit sharingthe payment of cash rewards or profit sharing
Budget Administration
Budget Administration
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•In large organisations, formal processes are In large organisations, formal processes are typically used to collect datatypically used to collect data
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•Budget administration is often the Budget administration is often the responsibility of senior managementresponsibility of senior management
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•A budget manual communicates: A budget manual communicates:

-Who is responsible for providing informationWho is responsible for providing information

-When the information is required When the information is required

-What form it will takeWhat form it will take
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•A budget committee may be formed to A budget committee may be formed to manage the budgeting processmanage the budgeting process
Responsibility Accounting
Responsibility Accounting
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•Responsibility accountingResponsibility accounting

-Managers are responsible for their area of the Managers are responsible for their area of the businessbusiness
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•Managers of various departmentsManagers of various departments

-Develop budget estimates for their area of Develop budget estimates for their area of responsibilityresponsibility

-They are then held responsible for meeting those They are then held responsible for meeting those budget targetsbudget targets
Responsibility Accounting (cont.)
Responsibility Accounting (cont.)
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•Responsibility centresResponsibility centres

-A unit of the organisation whose manager is held A unit of the organisation whose manager is held accountable for the unit’s activities and accountable for the unit’s activities and performanceperformance

-Cost centre, revenue centre, profit centre and Cost centre, revenue centre, profit centre and investment centreinvestment centre

-The type of responsibility centre determines the The type of responsibility centre determines the type of financial results for which a manager is held type of financial results for which a manager is held accountableaccountable
Master Budget
Master Budget
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•The master budget is a comprehensive set of The master budget is a comprehensive set of budgets that covers all aspects of a firm’s budgets that covers all aspects of a firm’s activitiesactivities
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•Consists of several interdependent budgetsConsists of several interdependent budgets

-Operating budgetsOperating budgets
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•Sales budget Sales budget
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•Cost budgetsCost budgets

-Financial budgetsFinancial budgets
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•Budgeted income statementBudgeted income statement
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•Budgeted balance sheetBudgeted balance sheet
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•Cash budgetsCash budgets
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•Capital expenditure budgetCapital expenditure budget
Components of the Master Budget
Components of the Master Budget
Strategic Planning
Strategic Planning
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•Strategic planning is longStrategic planning is long–term planning term planning usually undertaken by senior managersusually undertaken by senior managers

-Decisions about corporate strategy Decisions about corporate strategy

-Decisions about business strategyDecisions about business strategy

-A time horizon of three or more yearsA time horizon of three or more years

-Formulated in broad terms Formulated in broad terms

-Directly influences the formulation of budgetsDirectly influences the formulation of budgets
Strategic Plans and Budget Assumptions
Strategic Plans and Budget Assumptions
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•Budgets commence with an understanding of Budgets commence with an understanding of the strategy of the organisationthe strategy of the organisation
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•The budget should support the organisation’s The budget should support the organisation’s strategic plansstrategic plans
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•The budget is based on assumptions about The budget is based on assumptions about the competitive and economic environmentthe competitive and economic environment