Fundamentals Of Management Accounting

Budgeting

Fundamentals Of Management Accounting

Class Slides Ian Wilson

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Explain why a company will set out its plans

for a financial year in a budget.
Prepare functional budgets & Capital
Expenditure/Depreciation budgets.
Prepare a Master Budget.
Explain Budget statements
Identify Budget surplus or shortfalls in cash
terms
Prepare a Flexible Budget
Calculate Budget Variances
Prepare a reconciliation between Budget &
Actual results

We need to cover the following areas:

1. Budget preparation
2. Sales Budgets
3. Functional Budgets
4. Cash Budgets
5. Income Statements
6. Balance Sheets
7. Master Budgets
8. Flexed Budgets



Registers e-mails Breaks Revision

Mobile phones on silent
Completed :
1st 5 Chapters Revise content & attempt end
of chapter questions
Today:
Budgets Chapter 6 Notes
Depending on time, Standard Costing
Chapter 7



Why do you as individuals Budget?

Think about a company what do they need
to do!
Business planning at Pepsi was The Plan is
nothing but Planning is everything.
People just didnt budget at Pepsi, they made
commitments.
The budget should be a numerical
expression of the strategic plan. I really love
that, it says so much with so few words.



A Budget, What is it?.

a quantitative statement, for a defined period
of time, which may include planned revenues,
expenses, assets, liabilities and cash flows for
a forthcoming accounting period.
A budget (from old French word bougette,
purse) is a financial plan and a list of all
planned expenses and revenues. It is a plan
for saving, borrowing and spending

Budgets are prepared to:

to
1. Set & communicate targets
2. Establish a standard to which actual
performance can be compared
3. Co-ordinate inter/intra functional activities

Both functional budgets & a master budget can

be prepared
Remember P:D/M:C

Typical functional budgets:

budgets
1. Sales Budget
2. Sales Overhead Budget
3. Production Budget
4. Materials Usage Budget
5. Materials Purchase Budget
6. Labour Budget

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2.
3.

A MASTER BUDGET will include:

Income Statement
Cash Budget
Balance Sheet (Statement of Financial
Position)

Budget construction is overseen by a BUDGET

COMMITTEE who often produce a BUDGET
MANUAL.

Contains the following:

following
1. Objectives behind the Budget
2. Lists of organisational structures, Major
Budgets & Budget responsibility
3. Procedures & control
4. Timetables
5. Key assumptions made
6. Principle Budget Factors (PBFs)

Functional budgets prepared BEFORE the

Master Budget.
Many Budget changes can be expected and
are made before a final version is complete.
Process begins with identifying the PBF
(Principal Budget Factor)
This is a Limiting factor.
Sales, Labour Materials & Cash may all be
PBFs.

See pages 76 to 80 for Budget preparation

practice & examples.

Exercise
Exercise
Exercise
Exercise

1
2
3
4

Sales Budgets
Planning Production
Material Needs Usage & Purchases
Labour Budgets

Truro Ltd
1. Prepare Production Budget
2. Prepare Direct Labour Budget



Dealing with Stocks/Inventory:

Sales
PLUS Closing Stock
LESS Opening Stock
= Production Units
Production
PLUS Closing Stock
LESS Opening Stock
= Material Usage



Material Usage
ADD Closing Stock
LESS Opening Stock
= Materials Purchases
LABOUR EFFICIENCY:
If Efficiency is 80%, 20% of hours is wasted
To make product, input hours need to be
enough to make 100% of product.

What is a Cash Budget?.

Budget?

Recording of the cash impacts of the
functional budgets and is used as a planning
tool to deal with a cash surplus/deficit
positions.
1. Short term cash surplus
2. Short term cash deficit
3. Long term cash surplus
4. Long term cash deficit

Golden rules:
Cash items only NO DEPRECIATION
Timing - when cash impacts

Exercise 6 X Ltd Constructing a Cash Budget

Produce a Pro-Forma, that is the best

approach

Set up your grid, Rows & Columns, Columns

for each month January to April.
You need rows for each type of revenue &
expense
Deal with the easy items first
Machine Cost $50K in January BUT PAID IN
FEBRUARY!.
Rent $10K per month, paid in JAN & APRIL
Rates - $1K per month

Salaries 2 parts to this: 80% paid in month &

20% paid next month as this is overtime

You need an 80:20 split ie $8K & $2K per
month

The remaining issue to the difficult one,
Sales!.

Sales are made each month of:
1. Jan - $50K
2. Feb - $60K
3. Mar - $40K
4. April - $50K

Each month, Sales RECEIPTS in CASH are

phased in at: 60% after 1 month, 30% after 2
months & 10% after 3 months.
You have to produce a model that reflects
this position:
We also made Sales LAST year:
Some cash proceeds will fall into THIS year
Work this through also:
We can now BALANCE each month:

The MASTER BUDGET is an additional & vital

BUDGET prepared after the FUNCTIONAL
BUDGETS are known

For your C1 exam, the master budget will
include:
1. Budgeted Income Statements (IS)
2. Budgeted Statement of Financial Position
(SFP)



This is a Profit & Loss Account

Students may be given a partially completed
Income Statement on screen and asked to
complete with missing figures.
Pro-Forma on page 83

A student may be asked to calculate key

balance sheet figures.
This could involve either updating a current
balance sheet for a trading period or drafting
a balance sheet for a new business.
Pro-forma on page 84

Exercise 7 Budgeted Balance Sheet

All we have looked at to-date centre of

Fixed Budgets.
We now have to consider Flexible Budgets.
A Flexed budget considers varying levels of
activity.
a budget by which, by recognising different
cost behaviour patterns, is designed to
change as volume of activity changes

Relatively straightforward to produce as they

use marginal costing principles.
Fixed & Variable Costs are straightforward
Care needs to be taken with Semi-Variable
Costs.
You may have to use the High-Low method,
see earlier sessions.
Exercise 8 Flexing a Budget