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Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs 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 Ltd PPTs 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 Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

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Types of plans

Long term:
Medium term: Short term:

5 to 10 years
1 to 5 years up to 1 year

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

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The planning cycle

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

Plan

Action

Results

Revise

Remedy

Comparison of actual results to budget

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

variance
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Benefits of budgets
1. 2. 3. 4. 5. Forces managers to do planning. Realistic performance targets. Basis for controlling what happens within the organisation. Helps coordinate the activities of the various centres that make up the business. Communication managers exchange information on ideas, etc. Motivating tool if the process involves staff.
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

6.

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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 peoples behaviour may undermine the value of the process.

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs 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 Ltd PPTs 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 Ltd PPTs 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 Ltd PPTs 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 Ltd PPTs 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 Ltd PPTs 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
Purchases budget Cost of goods sold budget

Fees or fees & sales budget

Professional & support labour budget Cost of supplies used

Sales budget
Cost of production budget Cost of goods sold budget

Other operating Other operating Other operating expense budgets expense budgets expense budgets
Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs 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

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld

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