CIMA C1

Fundamentals Of Management Accounting

Budgeting

CIMA C1
Fundamentals Of Management Accounting
Class Slides Ian Wilson

Learning Aims (CIMA)

1.

2.

3.
4.
5.

6.
7.
8.

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

Introduction
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

Why do we Budget?
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.

Introduction
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

Introduction
Budgets are prepared 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

Functional Budgets
Typical functional budgets:
1. Sales Budget
2. Sales Overhead Budget
3. Production Budget
4. Materials Usage Budget
5. Materials Purchase Budget
6. Labour Budget

Master Budget

1.
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.

The Budget Manual

Contains the 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)

Budget Preparation
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.

Budget Preparation

See pages 76 to 80 for Budget preparation

practice & examples.

Exercise 1
Exercise 2
Exercise 3
Purchases
Exercise 4

Sales Budgets
Planning Production
Material Needs Usage &
Labour Budgets

Exercise 5
Truro Ltd
1. Prepare Production Budget
2. Prepare Direct Labour Budget

Cash Budgets
What is a Cash 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

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

Exercise 6 X Ltd Constructing a Cash

Budget

A Pro-Forma is the best approach

Master Budgets
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)

Budgeted Income
Statements
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

Budgeted Balance Sheet

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

Flexible Budgets
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

Flexible Budgets
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